The global expansion continues to hold steady, with our leading indicators showing that all major developed markets remain in the “expansion” regime and emerging markets (EM) are in “recovery.” However, we are seeing some signs of vulnerability, particularly in the United States.
As my colleagues Alessio de Longis and Dianne Ellis pointed out in a recent blog, the growing divergence between “soft” data (such as consumer and business sentiment surveys) and “hard” data (actual sales and activity) gives us reason for caution. If the “hard” data fails to improve in line with the surveys, and policy initiatives for tax reform and fiscal spending stall, U.S. equities may struggle to exceed already high valuations.
Caution Drives Shift in Portfolio Positioning
With this in mind, we have decided to reduce our exposure to U.S. equities to an underweight stance, and have increased our overweight to EM equities. We believe EM will continue to benefit from economic recovery and attractive relative valuations. Overall, we remain modestly long equity risk in the portfolio.
Outside of equities, we continue to see income and total return opportunities in EM local debt, given attractive real yields, stable inflation and cheap currency valuations in most high yielding markets. We also maintain our positions in income assets such as loans and event-linked bonds.
Among currencies, we maintain long exposure to higher-yielding emerging market currencies, and are modestly long exposure to the U.S. dollar versus lower-yielding developed currencies. Finally, we remain slightly underweight duration, especially in Europe and Japan.
As always, we continue to closely monitor the developments in the credit cycle, as well as the political and policy landscapes, to assess risks to the macro outlook and financial markets. I look forward to sharing our views with you again next month.
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Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
Emerging and developing market investments may be especially volatile
These views represent the opinions of the portfolio manager at 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.