Our view remains that the global macro environment is positive for equities. Most major developed markets are still in the “expansion” regime, while emerging markets are in “recovery.” However, we see evidence that the United States is entering a slowdown.

As we noted in our April update, we were seeing a growing divergence between “soft” data (e.g., consumer and business sentiment surveys) and “hard” data (e.g., actual sales and activity). At that time, the survey data had outpaced actual economic activity in the United States for several months. In the last month, this gap has begun to close but, instead of the hard data catching up to the soft data, the opposite has occurred and we’ve seen a decline in the survey data. This has negative implications for U.S. equities, which we believe will struggle to exceed their already-high valuations.

In contrast, data from Europe has improved and emerging markets remain positive as well. Further, both fundamental valuations and price momentum measures favor developed and emerging markets relative to the United States. Although the recent political turmoil in Brazil has caused notable market volatility, we don’t believe these events will mark the end of outperformance in emerging market asset classes.

Reduced Exposure to U.S. Equities, Increased Duration Exposure

As a result of this weakness, we have further reduced our U.S. equity position to a meaningful underweight, and increased our equity overweight outside the United States, particularly in Europe. Overall, we remain modestly long equity risk in the portfolio.

Given our expectation of a slowdown in the United States, we also increased our overall duration exposure to neutral. Consistent with our economic views, our relative position in government bonds is the mirror image of our equity exposure — we favor U.S. Treasuries over both European and Japanese bonds.

Among income assets, we are maintaining our overweight position in emerging market local debt, given attractive real yields, stable inflation and cheap currency valuations in most high-yielding markets. We are also maintaining our positions in loans and event-linked bonds.

Within currencies, we are maintaining our long exposure to higher-yielding emerging market currencies, and are near neutral to the U.S. dollar.

In summary, we see better opportunities in risky assets in Europe and emerging markets than in the United States, and are positioned accordingly. I look forward to sharing our views with you again next month.

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