Asset allocation quarterly – January 2019

11 Jan 2019


  • Central bank tightening fuels volatility – As financial markets begin to slowly grasp that central banks are no longer
    underpinning asset prices, sharper and sudden market moves look set to become the new norm. In such a world more
    emphasis will have to be on fundamentals again, and price action will be determined more by incoming macroeconomic data and corporate fundamentals.
  • Bonds no longer good hedges – As quantitative easing ends, we expect to see core bond yields moving structurally higher
    (especially as real yields and term premia reverse from their QE-depressed levels). This makes bonds less useful for portfolio hedging and we are diversifying using other assets.
  • What’s in the price? – We believe some bad news is already in equity prices. Previously elevated valuations have corrected
    sharply and our macroeconomic scenario framework shows that stocks have started pricing in the more bearish scenarios, but they could have further to run compared to our most bearish scenario.

Asset allocation 

  • Strategically neutral equities – We still expect weaker (but robust) global growth with risks skewed to the downside. With more volatility becoming the new norm, we remain structurally neutral equities, having closed our tactical overweight recently.
  • Underweight fixed income – We are underweight core bonds given our view of gradually rising inflation and monetary policy normalisation.
  • Aiming to be tactical – With more volatility on the horizon, we seek to be ever more tactical and reactive around our main structural proposition, deploying our tactical market dynamics tools. After decent widening, we closed our underweight on HY credit in early January.
  • Exploiting asymmetries to hedge and diversify – We continue to hold positions with asymmetries to our scenario analysis.
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