SUMMARY
Investors waiting for a single economic collapse are missing the opportunities that come with today’s “rolling recession.” Among other strategic allocations, we believe clients who move from cash to bonds can potentially lock in attractive fixed income portfolio yields for 5–6 years.
- For the past 18 months the fear of recession has left investors sidelined, waiting for a single economic collapse. Their behavior fails to acknowledge that the stampede out of equities and bonds last year accounted for a substantial portion of the market’s collapse and that the economy is in a rolling recession, with some industries far into their own downtrend.
- Good portfolio management is not about market timing. Rather, strategic asset allocation followed by specific tactical allocations is the best way to help optimize potential opportunities and diversify risks. While we moved from -1% in equities to neutral, we are no longer underweight US small and mid-cap shares. We have also reduced our US large cap and Chinese equity exposures slightly (Please see our latest Quadrant).
- We raised emerging market hard currency debt to an overweight position with a 2% initial increase. Mostly investment grade and globally diversified, EM USD debt yields about 7.5%, nearly double that of comparable US Treasuries. While we’ve maintained a 5.5% overweight in US Treasuries, we pared this position by 3% to finance our reallocation.
- We expect to make significant further increases to small and medium-sized companies (SMID) over time. US SMID trades at 14.2x 2023 estimates vs 19.9x for the S&P 500. Our exposure to non-US SMID is likely to be higher in the future, as well. Our non-US share exposure is up by 3.5% percentage in 2023. (Non-US shares trade at a record 41% valuation discount to the US.)
- We continue to suggest clients move from cash to bonds. With a variety of mostly investment grade credit opportunities, we believe investors can potentially lock in attractive fixed income portfolio yields for 5-6 years, which is much higher than the estimated cash yield over that future period.
