MARKET COMMENTARY

Solid Fundamentals Continue to Support Equities

06.19.2018 - Viraj B. Patel, CFA, FRM, CAIA

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Tax Reform and Deregulation Favor US Small-Caps

We remain confident in our “risk-on” asset allocation and overweight to global equities, a position supported by leading economic indicators that are still at or near cycle highs.

Equities: Looking for Opportunities

We are maintaining our overweight exposure to equities given the strong economic and corporate fundamental backdrop and fiscal thrust that remains in the pipeline. 

In the US, we also maintained our neutral view on equities, although we favor overweighting small-caps, which could be the biggest beneficiary of economic growth, tax reform, deregulation and the shift from monetary to fiscal policy. 

We also see opportunities in certain international developed markets, such as Japan and Europe, which appear to be in the earlier stages of an economic growth cycle than others, as highlighted by the divergence of central bank monetary policy. 

In emerging markets, our neutral view also remains in place. A stronger dollar has weighed on emerging market valuations, but currency risks appear to be contained to specific countries rather than the broader asset class. Therefore, we are watching the space closely for potential buying opportunities. 

Fixed Income: Positioned for the March Higher

Rising rates were a major theme for investors throughout the first half of the year, driven by multiple factors. The supply of Treasury bonds is increasing as new bonds are issued to fund government spending, while demand from the Fed is fading. An increase in oil prices also lifted inflation expectations, which encouraged higher rates, and the Fed has expressed confidence in the direction of economic growth. 

Within our fixed income allocation, we prefer US investment-grade credit over government bonds and we are maintaining our short duration bias relative to our benchmark to guard against interest rate risk. For investors in high tax brackets, the municipal bond market continues to offer tax-advantaged income. 

Alternatives: A Hedge Against Volatility

Low levels of market volatility and interest rates in recent years have dampened hedge fund performance, but a rising-rate environment is presenting new opportunities to generate alpha. Alternatives could also offer valuable downside protection for multi-asset-class portfolios if volatility remains elevated compared to 2017, as we expect it to, or if we experience additional sell-offs.


This communication is intended solely to provide general information. The information and opinions stated are as of June 19, 2018 and may change without notice. The information and opinions do not represent a complete analysis of every material fact. Statements of fact have been obtained from sources deemed reliable, but no representation is made as to their completeness or accuracy. The opinions expressed are not intended as individual investment, tax or estate planning advice or as a recommendation of any particular security, strategy or investment product. Please consult your personal advisor to determine whether this information may be appropriate for you. This information is provided solely for insight into our general management philosophy and process. Historical performance does not guarantee future results and results may differ over future time periods.

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