Asset Allocation Quarterly – October 2018

04 Oct 2018


  • Asset returns were mixed in Q3 2018, with US equities in the lead, but other markets lagging, as investors digested the risks from emerging markets (EM), Italian politics and advancing trade protectionism.
  • In September, however, equities and bond yields rose, suggesting that markets had become less preoccupied about these risks.
  • We disagree with this assessment. We still see the risks associated with US-China trade tensions, Italian politics and US monetary policy normalisation as a force that will weigh on markets in Q4 and 2019.

Asset allocation

  • We remain selectively long risky assets and underweight fixed income. But we have reduced overall risk and we are managing our positions more tactically. In particular, we have made these adjustments to our asset allocation over the past month:
  • While we remain structurally underweight EMU bonds, we have taken advantage of yield volatility and first increased and then trimmed our underweight tactically, taking profits as German Bund yields rose.
  • We closed our long Japanese equity exposure. This was an unhedged position, so the rally in equities was offset by losses from a weaker yen.
  • Finally, since we have reduced risk, we have less of a need for hedges against negative global shocks, so we have closed our short EUR/JPY position.
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