We are maintaining a neutral view and anticipate ongoing choppiness across the commodities complex in the near term. Precious metals have been strong performers against a backdrop of volatile equity markets, negative interest rates and a slightly weaker dollar, and crude oil and industrial metals have recovered from declines in early February. Oil remains a wild card but, in our view, a bottom may be forming with supply/demand potentially coming back into balance later this year or in early 2017.
Commodities: Falling Rig Count May Lead to Improved Supply/Demand Dynamics
Source: FactSet. Data as of February 29, 2016.
Committee members vigorously debated our views on hedge funds this quarter, but in the end elected to maintain our slightly above normal return outlook for both lower volatility and directional hedge funds. Within lower volatility hedge funds, unusual circumstances—crowded trades, exposure to the challenged sectors—hampered performance in an investment segment we felt should perform well. We continue to believe that these strategies offer an attractive risk/return balance given their ability to help buffer market shocks and their return potential in range-bound markets.
Yields available from private debt investing have been rising, presenting many attractive opportunities for investors who can lock up capital. Due to the current risk environment, however, the Committee feels it is important to avoid segments within private debt that are cyclical in nature or non-recurring. Energy and new issuance may present higher risks for the time being, but credits that we feel have been unfairly penalized could offer compelling return potential. In our view, distressed debt, particularly within a private equity versus a hedge fund vehicle, appears attractive.
U.S. Dollar: The Committee moderated its view for the dollar based on a more dovish FOMC rate path and communication that was delivered in March. While a strong labor market and aggressive easing by other major central banks may lend support to the USD, we believe currency markets have priced in these expectations accordingly and thus we anticipate a more constrained dollar following multiple years of strength.
Euro: We are holding a slightly underweight view of the euro, and anticipate that it will be range-bound in the near term. Weaker-than-expected inflation dynamics are likely to drive more ECB easing. Uncertainty about the global economy and broader geopolitical risks are also dampening our view.
Yen: We hold a slightly overweight view as a long yen remains a valid hedge against global risk aversion. In addition, PPP and real exchange rates may indicate that the yen is still undervalued against other G10 currencies.
Pound: A number of factors are contributing to our overweight view of the pound. The UK is experiencing relatively strong growth and supportive dynamics in output growth exist. Further, interest rate market pricing of a Bank of England hike is very low and we believe that the “Brexit” risk premium is attractive.
Swiss Franc: We hold an underweight view of the Swiss franc, believing it is overvalued and at risk of ongoing weakness.
EM FX (broad basket): We anticipate that pressure on EM currencies will continue until we see a more constructive and durable backdrop for global growth and commodities.
About the Asset Allocation Committee
Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted. The panel covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 24 years of experience.
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