Asset Allocation Update: Adopting a Cautious Stance

09.13.2019 - Viraj B. Patel, CFA, FRM, CAIA


Uncertainty Remains as Fundamentals Deteriorate

The escalation in trade policy and growing uncertainty around monetary policy has increased the potential for downside surprises. This, coupled with signals from markets such as yield curve inversions, has led us to reduce portfolio risk and adopt a more cautious stance toward global equity markets.

US Equities: Weakening Growth Outlook

We recently reduced our exposure to US equities to underweight. Though earnings have been coming in better than expectations, they have slowed from 2018. We believe continued trade uncertainty could weigh on third and fourth quarter earnings estimates. While the consumption and service portion of the economy have held up, weak manufacturing poses a headwind and may create a negative spillover effect.

International Developed Markets: Limited Growth

We recently recommended an underweight position in international large-cap equities. Continued trade uncertainty weighs on these markets as they are more exposed to global trade and manufacturing weakness. We believe growth opportunities may be limited, especially as investors worry about the limits of monetary policy in these regions to boost growth.

Emerging Markets: A Neutral Stance

We maintain our neutral positioning to emerging market equities. Though policymakers continue to promote new measures to support growth, currency weakness has led to tighter financial conditions for most emerging market economies, offsetting some of the stimulus measures that were implemented.

Fixed Income: Lower Rates

Interest rates have plummeted around the globe driven by fears of a global recession and heightened risks around trade policy. Central banks globally have made a renewed push toward more accommodative policies but doubts about the economic and policy backdrop have led to heavy demand for bonds. This demand caused a record amount of sovereign bonds to drop into negative-yield territory. We believe the potential for a move higher in longer maturity rates still exists, especially in the US, but rising downside risks and uncertainty are weighing on the near-term outlook.

Cash: Maintaining Nimbleness

We have increased our overweight allocation to cash as we look to preserve capital and to have cash on hand to take advantage of potential market opportunities presented by increased volatility.

Alternative Investments: A Hedge Against Volatility

We continue to recommend a strategic allocation to alternative investments for their potential for 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 September 13, 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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