Since the second half of last year we have been cautious in our portfolio allocations, particularly when the market seesaw we had predicted entering 2016 turned out to be more of a rollercoaster. However, this month we are singing a slightly different tune, as the seesaw tips toward a more favorable risk environment for the first time since we began writing these monthly updates some months ago.
Up until now, the United States and other developed economies-including Canada, Europe and Japan-have been in a slowdown regime, which is typically a mediocre environment for asset returns, while China had been in contraction, the worst regime for risk asset performance. In addition, market volatility has been high, with pronounced drawdowns last August/September and again in January/February of this year.
In contrast, we are now seeing early signs of improvement to a more positive environment. Our macro regime framework is indicating a move toward “expansion” across the major developed economies. This comes on the heels of evidence that emerging economies are entering the recovery regime. In addition, our risk outlook has improved, as volatility has declined across many markets. Tempering our optimism is the fact that valuations remain relatively full.
A Shift to a Neutral Position on Risk
We think these shifts collectively warrant a move to a neutral position in overall portfolio risk. To accomplish this, we are making several changes to our portfolio allocations:
- First, we are moving to near neutral in equities, reducing the underweight in U.S. and developed markets equities to about -6%, while maintaining an overweight to emerging markets of nearly 5%.
- Second, we are reducing the overweight in high yield credit from 8% to 3%. High yield has outperformed equity over the past few months and now offers a less compelling relative value opportunity than before.
- Third, we are reducing our duration posture from 0.5 years long to neutral. Treasury yields are again near their lows for the year and thus offer less potential for risk mitigation and may suffer if growth accelerates.
- Finally, we maintain a roughly neutral position in the dollar, with overweight positions to select emerging markets currencies and underweight positions to developed currencies including the euro and the pound.
In summary, our allocations reflect a more positive outlook than we have held in nearly a year. We have increased our overall exposure to risk assets while maintaining relative value positions where we believe the cyclical and valuation opportunities are most compelling.
We all know how a seesaw moves, so we are actively monitoring our indicators to see whether its tilt toward a “risk-on” environment will be prolonged—and we remain nimble to adjust our portfolios accordingly.
Visit our Global Multi-Asset Group webpage for additional insights about asset allocation and multi-asset investing.
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These views represent the opinions of OppenheimerFunds, Inc. and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.