Each month, when the GMAG team meets to discuss our research and investment views, we focus on three key questions:

  • First, does the economic environment support taking risk?
  • Second, what is the nature and level of risk across asset classes?
  • Third, how well compensated are investors to take risk?

These three questions guide our discussion around where the best opportunities and most significant risks are, and how portfolios should be positioned to take advantage of those opportunities and mitigate risks.

Today, we observe a host of mixed trends:

  • Developed economies remain a source of weakness, with Europe decelerating and key economic indicators in the United States foreshadowing a potential decline. Emerging markets remain more broadly positive, though the Chinese economy seems to be at a pause following six months of recovery.
  • In contrast with the economic data, the risk environment is more encouraging, as registered by measures of market risk and our proprietary Risk Appetite Indicator.
  • Valuations remain above average for most assets, and the relative value opportunities in high-yield credit and emerging market equities have decreased given their outperformance over the last six months.

With these views in mind, our key positions are as follows:

  • We remain modestly underweight equities, with most of the underweight attributable to Europe, and a small overweight to emerging markets.
  • We continue to hold a significant exposure to income-generating assets, but have taken advantage of the strong performance in high yield to reduce our holdings in favor of loans, which offer a step-up in quality with little loss in spread.
  • We remain neutral in duration.
  • Finally, we are effectively neutral on the U.S. dollar, with long exposure to a basket of higher-yielding emerging market currencies versus lower-yielding developed market currencies with poorer growth prospects.

These positions reflect our preferences for relative value over directional opportunities, as well as income assets as sources of potential return and diversification.

Visit our Global Multi-Asset Group webpage for additional insights about asset allocation and multi-asset investing.

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