In our Asset Allocation Outlook, “Beyond Beta,” published in January, we suggested that investors will be well-served by an emphasis on robust portfolio construction through targeted diversification and a focus on exploiting relative value opportunities, declaring that the days of bold beta bets are over. This post offers a brief update to these views.
Overall Risk Position
Since January, U.S. data have been mixed but generally moved closer to meeting the Fed’s conditions to begin hiking rates. Over the next six months, we believe markets will grow more volatile as investors seek to anticipate the Fed’s timing.
We remain overweight on risk assets, but we have somewhat pared down our overall risk posture: We want to mute the potential impact of a brief drawdown due to the uncertainties in Greece, and to prepare the portfolio to step back into our higher-conviction risk positions at more attractive levels over the next few months. Meanwhile, we continue to peer across markets to pinpoint the formation of upside catalysts and begin to express those views across our portfolio.
Equities: We remain constructive, but valuations have become more mature; country and region selection remain critical. Within developed markets we are underweight U.S. equities, benchmark-weight in Europe and overweight Japan (both currency-hedged). In emerging markets, we find Asia most attractive and focus exposure in China and Korea, which are supported by reforms and monetary stimulus.
Rates: We are underweight U.S. duration as markets appear to have fully priced in our New Neutral expectations. Nevertheless, our underweight is sized keeping in mind that bonds will continue to offer diversification versus stocks in a multi-asset portfolio. Given ultra-low interest rates, we are also underweight duration in core Europe. In contrast, we recently added to local Mexican bonds given attractive real yields.
Credit: Within credit, we mostly favor capital securities issued by European banks as they continue to delever and housing-related asset-backed securities in the U.S. We also recently added to select property credits in China, which we believe may benefit from policy easing underway there.
Real Assets: We like exposure to inflation breakevens in the U.S. We are maintaining a net neutral position in commodities, emphasizing relative value opportunities across energy, metals and agriculture sectors instead.
Currencies: Divergence in global growth and policy should continue to fuel the relative strength of the U.S. dollar versus global currencies, particularly the euro. Within EM currencies, the Indian rupee stands out given attractive local rates, a strong central bank and falling inflation.
Please stay tuned for our secular Asset Allocation views coming in June.