This is the first in a series of monthly updates on recommended asset allocations from OppenheimerFunds’ Global Multi-Asset Group (GMAG). The group combines analysis of macroeconomic regimes, market conditions and risk to dynamically manage the Global Allocation Fund through the market cycle. GMAG’s asset allocation recommendations are designed to help financial advisors better diversify their portfolios, control risk and manage them through time.
Asset Allocation Recommendations
Since early June, we have taken a conservative posture by underweighting equities and adding exposure to bonds. Given the high volatility and negative momentum in today’s markets, as well as a lackluster economic outlook, we believe it is prudent to maintain an underweight position in equities at present. For a typical 60/40 investor we recommend an underweight to equities of about -6%.
We develop our asset allocation recommendations through a combination of multiple, independent perspectives on the markets. Our investment framework integrates analysis of macroeconomic regimes, market conditions (valuation and momentum), and risk across asset classes. Many of our indicators have deteriorated since early June, and are flashing warning signals about the near term.
Currently, the risk environment has taken center stage as concerns over weak growth in emerging economies, falling commodity prices, and the direction of Federal Reserve policy drove recent market volatility to levels we have not seen since the debt ceiling crisis of 2011 (Exhibit 1). Our research tells us that investors are typically not well compensated for bearing this level of risk.
As volatility has spread, nearly all equity markets have suffered negative returns over the third quarter (Exhibit 2). Momentum is strongly negative across most equity markets. Despite a decline in valuations, many equity markets are still expensive relative to history and have not yet fallen to attractive levels.
Finally, our leading measures of economic activity indicate that most developed economies are decelerating from recent highs, and thus are moving from an “expansion” regime to an early phase of the “slowdown” regime within our macro regime framework. In this stage of the business cycle, assets typically deliver only average compensation for risk, with a higher degree of uncertainty relative to other regimes.
Looking forward, we are particularly focused on developments in corporate credit markets, both investment grade and high yield, as well as the direction of the U.S. dollar. Since mid-2014, credit spreads have widened above their long-term averages, while the dollar has strengthened significantly versus most major currencies. Together, these factors have tightened financial conditions in the U.S., which may further restrain economic growth in the coming months.
The Alerian MLP Index (AMZ) is a composite of the 50 most prominent energy Master Limited Partnerships that provides investors with an unbiased, comprehensive benchmark for this emerging asset class. The FTSE National Association of Real Estate Investment Trusts (NAREIT) Equity REITs Index consists of companies that own and operate income-producing real estate that have 75% or more of their respective gross invested assets in the equity or mortgage debt of commercial properties. The Barclays Global High Yield Index is a multi-currency flagship measure of the global high yield debt market. The Global High Yield Index is a component of the Multiverse Index, along with the Global Aggregate, Euro Treasury High Yield and EM Local Currency Government Indices. The S&P 500® Index is a capitalization-weighted index of 500 stocks intended to be a representative sample of leading companies in leading industries within the U.S. economy. The MSCI Emerging Markets Index is designed to measure equity market performance of emerging markets. The MSCI AC World ex-U.S. Index is designed to measure the equity market performance of developed and emerging markets and excludes the U.S. The Russell 2000 Index measures the performance of the small-cap segment of the U.S. equity universe. The Bloomberg Commodity Index is a broadly diversified index that is composed of futures contracts on 22 physical commodities traded on U.S. futures exchanges, with the exception of aluminum, nickel and zinc, which trade on the London Metal Exchange. The MSCI Japan Index is designed to measure the performance of the large- and mid-cap segments of the Japanese market. The MSCI AC Europe Index captures large- and mid-cap representation across 15 Developed Markets countries and 6 Emerging Markets countries in Europe. The BofA Merrill Lynch Current 10-Year U.S. Treasury Index is a one-security index comprised of the most recently issued 10-year U.S. Treasury note.
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 any investment.
Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
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 open of business on the publication date, and are subject to change based on subsequent developments.