A $1 Trillion Fund Gorging on Risk Says Fed at ‘Market's Mercy’

(Bloomberg) -- The ticket to outperformance this year is as simple as betting the Federal Reserve will temper its tightening plan -- and do the bull market’s bidding, according to investors that help oversee a combined $1.4 trillion.

Armed with dovish monetary bets, they’re pouncing on risk assets of all stripes across the globe -- but snubbing Europe.

The Fed is “at the mercy of the markets,” said Wouter Sturkenboom, Northern Trust Asset Management’s Amsterdam-based chief investment strategist for Europe and Asia. “That’s why we have re-instigated a risk position” across stocks in the U.S. and emerging markets at the expense of investment-grade bonds, he said.

The firm, which oversees about $1.1 trillion of assets overall, sees clear sailing for the rally for now.

The five-year U.S. government bond yield would need to rise “meaningfully” to give the central bank the green light to push ahead with its indicative tightening plan, according to Sturkenboom.

A $1 Trillion Fund Gorging on Risk Says Fed at ‘Market's Mercy’

Over at Neuberger Berman Investment Advisers LLC, which oversees about $300 billion overall, the firm’s asset allocation committee is singing a similar tune. It’s adding equities and bonds of developing nations while cutting cash and government debt, according to Erik Knutzen, CIO of multi-asset strategies.

At the center of it all: The belief that the greenback is losing steam.

“We really just need it not to appreciate for our view to hold,” said Knutzen. “If the Fed is pausing, if inflation is moderate, then a lot of the hugely wide rate differentials and spread differentials between the U.S. and the rest of the world will start to ease.”

After violent swings in the ‘America First’ trade last year, Neuberger’s top macro call is the tentative re-convergence for the rest of the world, helped by liquidity and signs of progress in U.S.-China trade talks. Over the past week, the firm took profits on American equities as the asset class notched the best start to a year since 1987.

Europe could be one big loser in all this, however. Between Brexit and populism in the euro area to shifts in leadership in Germany and the European Central Bank, the region is plagued by economic and political risk. That’s prompting Neuberger and Northern Trust to look elsewhere for returns.

“We are going to need greater conviction in the growth outlook to increase exposure to European stocks,” according to Sturkenboom.

Regardless, buy-and-hold strategies could upend investors this year as late-cycle risks grow, Knutzen warns.

“It’s still going to be volatile. As optimistic as people are starting to get, there’s still good reason to be cautious.”

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