Still stocks

  • Written by 
  • 14/12/2016

We expect the world economy will continue to grow at above stall speed and see the cycle end as a relatively distant prospect. Here, we explain our current thinking behind our recommended tactical positioning. We still see investors being best served by leaning portfolios towards developed equities, and in the US and Europe ex-UK in particular.

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We maintain a Strategic Asset Allocation for five risk profiles, based on our outlook for each asset class. Our Tactical Allocation Committee (TAC), made up of our senior investment strategists and portfolio managers, regularly assesses the need for tactical adjustments to those allocations, based on our shorter-term (three to six month) outlook. Here, we share our latest thinking on our key tactical tilts.


Developed Markets Equities - Overweight

  • The prospects for US consumption remain well-founded on a robust jobs backdrop, characterised by more visibly rising wages, which in turn is helping the appetite for credit to continue to recover
  • The negative hit from oil prices on associated corporate earnings is fading as is the headwind to profits from the previous ascent of the US dollar
  • US operating earnings have now made it back into positive territory year-on-year following the now almost complete US Q3 earnings season
  • Within the developed world, our preferred markets remain the US, Europe ex-UK and UK in roughly that order
  • For the US, we are not expecting further gains to come from multiple expansion, but from continuing earnings and dividend growth
  • For our overweight position in Continental European equities, much depends on the performance of the embattled banking sector where we expect a more helpful yield curve to continue to alleviate some of the more apocalyptic concerns
  • Our more positive outlook for oil prices is part of the reason that we have turned more positive on large cap UK equities

Emerging Markets Equities - Overweight

  • We moved our recommended tactical position in Emerging Markets Equities up to overweight from neutral in November
  • The emerging markets business cycle is bottoming, as evidenced by business confidence surveys and trade data
  • Trade data has collapsed and recovered in value terms due to commodity price swings, but the latest round of business confidence surveys have seen a sizeable rebound
  • US consumption also looks healthy, with wages now more visibly picking up and credit provision following suit
  • The fundamental macroeconomic backdrop has turned more positive for emerging markets corporate profitability
  • Asia remains our preferred region, with Korea, Taiwan and China (offshore) our highest conviction country views on a strategic basis


High Yield & Emerging Markets Bonds - Overweight

  • Earlier in the summer we moved from a tactical underweight to overweight position in High Yield and Emerging Markets Bonds by adding to Global High Yield
  • This was funded by moving from a tactical overweight to neutral position in Cash & Short-Maturity Bonds
  • Given our more sanguine take on the various risks to global growth and inflation, yields on junk credit look attractive on a risk-reward basis
  • We have more recently neutralised our earlier underweight position in local currency Emerging Markets Bonds, again using Cash & Short-Maturity Bonds

Cash & Short-Maturity Bonds - Underweight

  • While Cash continues to play a pivotal portfolio insulation role, the rising appeal from Emerging Markets Equities has led the Tactical Asset Allocation Committee to deploy our cash holdings into the latter, bringing our position in Cash & Short-Maturity Bonds from neutral to underweight

Developed Government Bonds - Underweight

  • Nominal yields offered by large chunks of the government bond universe are still negligible, even after the fairly dramatic sell-off seen since the summer
  • Our view remains that such valuations underestimate the underlying inflationary pressures within the US economy in particular – something that incoming inflation data pays some testament to
  • For us, the level of (returns insensitive) central bank ownership probably suggests that the bond market will remain more or less orderly and may lag a pick-up in inflation
  • Our continuing small strategic and tactical allocation to the area indicates that higher real returns lie elsewhere

Investment Grade Bonds - Underweight

  • The spread of investment grade credit over government bond yields has held more or less firm amidst the above-mentioned correction
  • Nominal yields in high quality corporate credit remain low in absolute terms and may make the job of those trying to make positive real returns difficult


Commodities - Neutral

  • We closed our long-held underweight in the commodity complex in May
  • US monetary normalisation will likely provide a headwind, but the stabilisation in Chinese growth looks sufficient to offset this for the moment
  • Investors are likely best served by tilting their commodity exposure towards oil and away from gold where possible, with the latter still particularly vulnerable to further US interest rate rises
  • We see oil prices continuing to drift higher over the coming 12 – 18 months as the market’s worst fears on China fail to materialise and a smaller than suspected surplus is worked through

Real Estate - Neutral

  • Recent volatility has served as a timely reminder of the importance of maintaining a diversified portfolio with the ability to weather a number of market environments, and we continue to encourage clients to ensure that they maintain a neutral strategic weight to Real Estate.

Alternative Trading Strategies - Underweight

  • We shifted our previous tactical underweight in Commodities to Alternative Trading Strategies (ATS), primarily
    due to the difference in volatilities for the two asset classes
  • There is less risk being underweight the lower volatility ATS in the current market environment in our opinion
  • Regulation and lower leverage leave this diversifying asset class without much tactical appeal at the moment