Tag: Asset Allocation
Asset Allocation Perspectives with Robert Williams, Director of Research
Asset Allocation Perspectives with Robert Williams, Director of Research
Asset Allocation Perspectives, June 2020
The following presentation outlines the current economic conditions, monetary policy response and valuations, as well as how Sage is positioned in the current environment.
Asset Allocation Perspectives with Robert Williams, Director of Research
Asset Allocation Perspectives April 2020
The following presentation outlines the current economic conditions, monetary policy response and valuations, as well as how Sage is positioned in the current environment.
Asset Allocation Perspectives March 2020
Our base case includes a scenario in which markets continue to be volatile due to virus spread uncertainty, the economic impact, and the evolving policy response; this makes it challenging to gauge a fundamental bottom. The following presentation outlines the current economic conditions, monetary policy response, and valuations, as well as how Sage is positioned in the current environment.
Putting Trade into Context: Sage’s Outlook on Emerging Markets
For over a year, U.S.-China trade tensions have seized investor sentiment and dominated headlines. While tariffs and a potential resolution to the current episode are important for near-term price action, it’s only one piece of the puzzle. At Sage, we take a broader view on China and trade to determine our outlook for Asia and its effect on emerging markets (EM).
The fundamental issue facing global growth is that the source of China’s economic growth is changing. The country is shifting its growth model from one of exports and fixed investment spending to consumption-led growth. Officials have attempted to rein in China’s debt levels from the high credit growth of the past 15 years, which should result in a lower, but sustainable rate of growth. U.S. exports are a relatively small contribution to Chinese GDP, and the risk of trade tensions has been more about how it could affect business and investor sentiment than the impact on economic growth. The threat of tariffs was a catalyst for last year’s EM selloff, but those risks have been mitigated given a potential trade agreement between the U.S. and China in the coming months.
When we look past trade tensions, the underlying issue is that the Chinese economy is in a material slowdown. The chart below shows global manufacturing activity as measured by the Purchasing Managers’ Index, a common leading economic indicator. Chinese manufacturing activity has slowed to a level that indicates an economic contraction.
Chinese policymakers have responded with fiscal stimulus but have yet to introduce a liquidity injection to boost the property sector, which was China’s playbook for 2016. While the recent stimulus measures will help, its “impulse,” the effect that it will have on the Chinese economy, may not materialize for six or more months.
China is a huge trading partner to other EM countries, such as Taiwan and Korea, and recent figures from those countries have shown the magnitude of the Chinese slowdown.
In addition, commodity exporters, such as Chile, Australia, South Africa, and Brazil, have seen exports decline in recent months. These export numbers are a bellwether to growth in Asia and have the potential to hurt investor sentiment for EM assets.
Given recent strength in EM equities, particularly China, we have decided to underweight emerging markets throughout our equities, fixed income, and asset allocation strategies. The risk to this view is twofold: 1) flows moving into China due to index inclusion (MSCI) and investor demand, and 2) the economy responding positively to recent stimulus or a trade agreement in the near term (0-6 months). Ultimately, we believe these outcomes are improbable given the rapid buildup of flows and the current extreme positive sentiment surrounding EM assets.
The source for both charts are Bloomberg and Sage, as of 3/13/19.
Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.
Is Too Much Optimism Priced Into Risk Markets?
Macro conditions have continued their positive trajectory throughout the first quarter of the year, with US economic activity at the highest pace post-crisis and the labor market showing healthy job creation and wage growth. Meanwhile, global inflation is increasing and downside risks have largely subsided.
Markets are responding with a strong rally in equity markets, higher bond yields, and tighter credit spreads. With this abundant optimism, we would caution against over-bullishness given the fact that current sentiment is largely reflected in current prices.
Risk assets may be prone to bouts of policy-related volatility as the new administration works to implement fiscal stimulus and the Fed tightens monetary policy in response to financial conditions.
Finding Opportunities in Fixed Income
After a sharp spike higher in the fourth quarter of 2016, yields have been largely range-bound this year. The Fed’s forward guidance on rate hikes, coupled with an uptick in inflation data, means that yields could drift modestly higher over the next two quarters. However, we continue to believe that strong global demand for US fixed income will balance tighter monetary policy, keeping rates contained.
Within our asset allocation strategies, we are slightly short duration, maintain an overweight to credit, and hold an allocation to both preferreds and bank loans. Additionally, we recently increased an allocation to TIPS, which look attractive when compared to traditional measures of inflation, including core CPI and wages.
International Equities Show Promise
We continue to be constructive on equities and remain focused on relative value opportunities, holding an overweight to core international markets, which are attractive from a valuation perspective when compared to US equities. We believe developed international equities will benefit from global reflationary trends, weaker currencies, and still favorable monetary policies relative to the US.
As we move towards year-end, policy and politics will continue to dominate the conversation. As optimism wanes, volatility will most likely increase. The best way to weather volatility is by maintaining a sound risk management discipline rooted in relative valuation and fundamental analysis.
For more insight, please visit our Asset Allocation or reach out to the team at 512-895-4130.
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.
3 Key Macro Themes for the First Half of 2017
While politics and fundamentals continue to drive the investment outlook, at Sage, we believe it is the global macro landscape which is central to investing in the first half of 2017. As the new year unwinds, we see an overall favorable backdrop for risk assets given improving global data, robust earnings outlooks, and fiscal stimulus expectations. At the same time, we anticipate slowdown in the “trump trade” – or bullish near-term momentum – given that much of the optimism is already priced into markets. Still, the macro picture remains dominated by global monetary policy, fiscal policy follow-through and a volatile political landscape, leaving markets vulnerable to wide swings, overshooting and undershooting fair value. In greater detail, here is what we at Sage see as the three main factors influencing the next six months – and how we are adjusting accordingly:
Expect a more stable first half for fixed income
After the historically poor fourth quarter for fixed income, we expect both a more stable first half and some upside potential in the first quarter. We believe the rate sell-off was overdone into year-end and expect yields to remain in a fair value range during the first half of 2017. Increased equity volatility is also on the horizon, with some profit to be had in risk assets, and a slowdown in the pace of improving economic data supportive of core fixed income returns. While rate hikes combined with upside growth and inflation potential will continue to apply upward pressure to rates, we expect this to materialize later in the year. As in 2016, we expect upside opportunities in the first half and the second half to be more about risk mitigation.
Look to international diversification within equity allocations
We believe developed international markets will benefit from the global reflationary trend, weaker currencies, and still favorable monetary policies relative to the US. In addition, international markets, particularly Europe, are attractive from a valuation perspective. Given how much optimism is already priced into US markets, and the level of pessimism toward international markets, we see greater upside overseas in the next few quarters.
Take advantage of relative value opportunities
Two markets we believe had run too far into year-end were rates and the dollar. To this end, we have pursued relative value opportunities by adding duration and Gold to our strategies in order to benefit from the rollover in both rates and the dollar. While it may be tempting to focus on the domestic front for the first half of 2017, discounting the macro picture will do you no favors. With stability for fixed income, optimism for international equities and an emphasis on relative value investing, 2017 provides ample opportunities for those who invest wisely.
For more insight, please visit our Asset Allocation and Fixed Income Perspectives or reach out to the team at 512-895-4130.
Sage Advisory Services, Ltd. Co. is a registered investment adviser that provides investment management services for a variety of institutions and high net worth individuals. This report is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results. For additional information on Sage and its investment management services, please view our web site at www.sageadvisory.com, or refer to our Form ADV, which is available upon request by calling 512.327.5530.