Asset Allocation
We do not expect the oil shock to have a lasting effect on inflation. Looking further out, a variety of structural forces will influence inflation, including fiscal policy, globalization, demographics, and AI.
We have received several questions from clients regarding practical issues surrounding strategic positions on gold. We find that gold is liquid and relatively inexpensive to trade while being a reliable diversifier that provides enough excess returns to account for loss in yield.
We explore how markets reacted to different oil supply shocks in the past, how conditions differ today, and provide a playbook for investors to navigate the current crisis. Remain neutral between equities, bonds, and cash. Downgrade Tail Risk Strategies from Max Overweight to Overweight.
MacroQuant recommends a strong underweight position in equities, favors a below-benchmark duration stance in fixed-income portfolios, has become neutral-to-slightly positive on the US dollar, has downgraded gold to neutral and copper to a strong underweight, and is bullish on oil.
The current macro environment is a toxic brew of many of the same vulnerabilities that haunted the global economy in the lead-up to past recessions: Rising oil prices, an unsustainable tech capex boom, elevated equity valuations, excessively high homes prices, and brewing stresses in private credit and other parts of the financial system. While global equities look increasingly oversold in the very near term, they will still finish the year below current levels.
Although Value has had a meaningful run, the longer-run Growth trend likely remains intact. However, benchmark Growth indices are increasingly concentrated. Sector-neutral and within-sector implementations may allow investors to retain much of the same Growth/Value exposure while reducing dependence on technology and limiting concentration risk.
Higher oil prices threaten the global economy, warranting an underweight stance on equities. Over the long haul, industrial metals will fare better than crude.