We continue to see the broad-based global expansion that we highlighted last month. Fundamentals remain positive across all major regions, as our global leading economic indicators continue to be in the expansion regime. (Exhibit 1) This view is confirmed by our market sentiment and momentum indicators, and by the low level of stock market volatility. In short, all of our key near-term measures are positive.
Diversifying Duration Exposure
With that backdrop, we did not make many changes to our portfolios over the course of the month, with the exception being in developed market bonds. Our overall duration exposure to developed markets remains neutral, but we reduced our overweight position in U.S. Treasuries and diversified our exposure by adding to Europe, the United Kingdom, Canada, and Japan. We decided to reduce our exposure to U.S. rates given the potential for tax cuts and the upcoming appointment of a new U.S. Federal Reserve chair, which could be disruptive for bonds.
Asset Allocation Overview
Otherwise, the key themes in our portfolios remain as follows:
- We are overweight risk assets and prefer European and emerging market equities versus the United States;
- We continue to hold emerging market debt, which offers higher nominal and real yields than developed markets;
- In credit, we maintain our allocations to loans which, in our view, offer attractive risk-adjusted spreads versus other forms of credit;
- In currencies, we are overweight emerging market currencies, where yields and valuations remain attractive. We also have exposure to the Japanese yen as a means of balancing risk in the portfolio, and are underweight the U.S. dollar.
Event-Linked Bonds Update
Finally, I would like to share an update on event-linked bonds. The market continues to recover from the hurricanes and earthquakes in September; the Swiss Re index is up about 1.8% since our last update. Year-to-date, the index is down about -1.5%, nearly 5% below its peak at the beginning of September. We maintain our allocation to the asset class given its diversification versus traditional assets, and will keep you up-to-date on developments in the space.
Investing involves risk and is subject to market volatility
The Swiss Re Global Cat Bond Index tracks the aggregate performance of all U.S. dollar and euro- denominated cat bonds, capturing all ratings, perils and triggers. The Index seeks to hedge out the euro risk at the inception of each bond. The index is based on Swiss Re pricing indications only. Indices are unmanaged and cannot be purchased directly by investors. Index performance is shown for illustrative purposes only and does not predict or depict the performance of the strategy. Past performance does not guarantee future results.
This material is for informational purposes only and is not intended to be investment advice, a recommendation, or to predict or depict the performance of any investment.