Euro politics, and continuing US fiscal indecision, have always been two very visible potential triggers for a rebound in stock market volatility after the relative calm, and solid gains, of recent months.
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With equities still looking inexpensive, despite their rally since last summer, this leaves us firmly overweight developed stocks in particular
TAA: risk assets still favoured
We do not think that they yet warrant changes to our Tactical Asset Allocation. Instead we continue to focus on the euro likely remaining intact, backstopped by the ECB, and on the ongoing growth in the US and global economy. With equities still looking inexpensive, despite their rally since last summer, this leaves us firmly overweight developed stocks in particular (which is where we think the chances of beating (low) expectations are greatest). We are more wary of fixed income assets, which are still historically expensive. We are tactically underweight investment grade credit, and our recommended long-term allocation to government bonds was recently lowered in the annual review of our Strategic Asset Allocation (as reported in February’s Compass).
Figure 1: Current strategic (SAA) and tactical (TAA) asset allocation by risk profile
Figure 2: Total returns across key global asset classes