Asset Allocation Views
The most significant change to our portfolio views in October is to overweight European equities by about 7%, while hedging the additional exposure to the euro. As mentioned last month, we maintain underweight views for U.S. and emerging markets. Overall, for a typical 60/40 investor, this implies an underweight to equities of -3%. In addition, we suggest increasing fixed income duration to an overweight of about 0.5 years.
We develop our asset allocation views through a combination of multiple, independent perspectives on the markets. Our investment framework integrates analysis of macro-economic regimes, market conditions (valuation and momentum), and risk across asset classes.
Increasing European equity exposure is driven by three factors:
- Better growth fundamentals: Our leading economic indicators show that Europe is in the “expansion” regime, which is typically favorable for equities, while the U.S. and most other major economies are in “slowdown,” which is a more uncertain environment for asset class performance
- Further monetary policy support from the ECB
- More attractive equity valuations
Our decision to hedge the additional euro exposure is also influenced by the divergence in monetary policy between the U.S. and Europe. While the ECB announced that it is considering an expansion of its quantitative easing program, the Federal Reserve has indicated that it may hike interest rates in December. Given this separation, we favor the dollar versus the euro.
We saw a similar opportunity develop late in 2014. We held an overweight to hedged European equity of as much as 15%. European equity surged ahead roughly 20% in local terms over the first few months of 2015. We cut our position to neutral as the valuation gap closed significantly. Subsequently, European equity gave back nearly all of its gains during the summer sell-off, bringing it back to a more attractive valuation level.
Source: Factset, 10/31/15. The MSCI Europe Index is a free-float weighted equity index designed to measure the equity market performance of the developed markets in Europe. The index is unmanaged and cannot be purchased directly by investors. Past performance does not guarantee future results.
Elsewhere, we remain cautious about near-term prospects. While market volatility has subsided from high levels over the last month, underlying economic conditions remain mediocre in much of the world. We believe an interest rate hike by the Fed could engender renewed market volatility and weaken the U.S. and emerging market economies. We favor increasing the duration of bond portfolios to enhance their defensive potential in the event of further market disruptions.
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Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
These views represent the opinions of OppenheimerFunds and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the open of business on the publication date, and are subject to change based on subsequent developments.