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Staying bullish, but raising portfolio quality

Steven Wieting

By Steven Wieting

Chief Investment Strategist

October 19, 2018Posted InInvestments and Investment Strategy

Global financial markets have suffered a nasty bout of nerves just lately. Developed world equities shed almost 7% from late September, with other risk asset classes including high yield fixed income also taking a hit. We see a variety of factors behind these falls, some of them temporary but some of them also likely to prove longer-lasting. But are investors overestimating the immediate fundamental risks?

We believe that they probably are. The outlook for both US and global growth continues to look robust, in our view. Against a backdrop of rising US interest rates and firming cost pressures, we expect the US economy to slow moderately in 2019. Near-term company earnings reports seem poised to surpass consensus expectations. And, the persistent worry around US trade policy is likely already priced into many markets.

Our expectation, therefore, is that global equities will recover from their recent decline. That said, we have made some changes to our tactical positioning. At our 17 October meeting, the Citi Private Bank Global Investment Committee continued to raise the overall quality of our allocations, and increase diversification. As a result of the changes, we cut our global equity overweight from 1.5% to 1% and raised our allocation to fixed income from 1.5% underweight to 1% underweight.

To achieve this, we’ve added significantly to our already overweight holdings of short-duration US Treasuries, corporate debt, and municipals for US-taxpaying investors. We’ve also made some country-level adjustments to emerging market (EM) debt, where certain bonds look attractively priced. On the equity side, we’ve lowered our allocation to US small- and mid-cap, as well as trimming our allocation to India from overweight to neutral. We expect to make further improvements to our allocation quality going forward.

Clients can read the GIC’s full thoughts in GIC Asset Allocation – October 2018.