Asset Allocation
The mini-consolidation in equities reflects the ongoing tension between market-supportive liquidity and a sketchy corporate profit backdrop.
Global bond yields continue to grind higher, led by signs of improving growth, moderately higher inflation and central banks having difficulty staying credibly dovish. Maintain a below-benchmark duration stance.
Our <i>Fourth Quarter Strategy Outlook</i> presents the major investment themes and views we see playing out for the rest of the year and beyond.
This week, we are reviewing all of our active trades discussed in the last twelve months, which are intended to be an overlay to our recommended fixed income portfolio.
There are two key risks that could derail a bear-flattening of the yield curve. The first is a Trump election victory, the second is a flaring of stress in the non-U.S. banking sector.
The DM Country Model favors the U.S., with Japan and U.K. being the two large underweights. The Sector Model continues to recommend a cyclical tilt.
In September, the model outperformed the S&P 500, while it underperformed global equities in both USD and local-currency terms. For October, the model trimmed its allocation to stocks and boosted its weightings in bonds and cash.
It's hard to make a case for attractive returns from any asset class over the next year. We dial down risk a bit but ending our overweight on junk bonds. Investors should pick up yield where they can but without taking excessive risk.
This month's <i>Special Report<i/> looks at the Fed's policy options in the event that there is a negative economic shock while the policy rate is still very depressed. The Fed's "Plan A" is more QE and forward guidance, which are not up to the task. There is no "Plan B", which means that risk assets will be hit hard during the next downturn.
Investors stand to benefit from Czech koruna revaluation versus the euro and also from positive carry, while waiting for the central bank to remove the exchange rate floor. Go long CZK / short euro. Economic fundamentals and policy divergence between Poland and Hungary point to a stronger zloty versus the forint. Go long PLN / short HUF.