Asset Allocation Update: Fundamentals Have Been Slightly Better Than Expected, Despite Lingering Trade Tensions

06.20.2019 - Viraj B. Patel, CFA, FRM, CAIA


Expectations for trade and monetary policy helped lift the markets from their December 2018 lows. However, these two policy pillars have recently become marginal headwinds and have weighed on financial markets and sentiment.

Despite positive surprises from first quarter 2019 earnings, the recent rollover in leading indicators coupled with the slowdown in economic activity, has increased uncertainty and has clouded the outlook for global growth in the second half of 2019.

US Equities: Trade Tensions Leave Question Marks

We are neutral US equities. While we still see the potential for a rebound in economic activity and policy support from the Fed, further trade uncertainty coupled with economic weakness could increase downside risks. Although US mid- and small-cap equities could be isolated from increased trade risks compared to US large-caps, their higher beta could make them vulnerable in a risk-off environment.

International Developed Markets: Pros and Cons
We maintain our neutral positioning to International Developed Equity Markets. Despite experiencing weaker growth for much of the last year, we are seeing signs of stabilization and, in some instances, even green shoots. However, we are cautious about the increase in populism and limited policy space for central banks to ease. 

Emerging Markets: A Neutral Stance

We maintain our neutral positioning to Emerging Market equities. Though we continue to see China stimulus filter through into the economy as policymakers take necessary and or appropriate actions to support growth, currency weakness has led to a tightening in financial conditions for most emerging market economies. 

Fixed Income: Limited Return Potential

The recent rally in fixed income markets appears to reflect worries around trade tensions and economic growth and has forced more dovish signals from the Fed. However, the increasing expectations of deeper rate cuts currently being priced in by markets are at odds with our outlook for economic growth, while more in line with shorter term trends.  

Cash: Maintaining Our Nimbleness
The two policy pillars, monetary and trade policy, have supported the right side of the V-shape recovery. However, they have recently started to turn into marginal headwinds. For this reason, we maintain an overweight allocation to cash as we search for opportunities and guard against downside risk. 

Alternative Investments: New Alpha Opportunities
We continue to recommend a strategic allocation to alternative investments, which can provide multi-asset-class portfolios with a degree of downside protection, broader diversification, and better risk-adjusted returns.

This communication is intended solely to provide general information. The information and opinions stated are as of June 20, 2019 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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