Asset Allocation re-balance: Dec Qtr
About the author:
- Author name:
- By Andrew Tang
- Job title:
- Analyst - Equity Strategy
- Date posted:
- 19 October 2020, 12:50 PM
- Sectors Covered:
- Equity Strategy and Quant
- Strategic Asset Allocation (SAA) provides a framework within which investors can target an expected return for a given level of risk. It is one of the most important, but one of the most overlooked aspects of wealth management.
- Morgans approach to SAA applies long-term benchmark allocations per asset class, around which we apply shorter-term tactical tilts, re-balanced quarterly.
Gradually relaxing defensive tilts
We see risk assets making further gains as the global economy continues to recover, even if only gradually. We suspect that equities and currencies in parts of the emerging economies including Australia will be the best performers over the next 12-18 months. At the same time, we think that the yields on safe government bonds will remain around their current low levels.
The recovery in risk appetite and the fall in US interest rates relative to those elsewhere will continue to weigh on the US dollar, although uncertainty about the post-virus outlook and the risk of a re-escalation of US-China tensions may keep the dollar from falling much further in the near term.
Crucially, our forecasts rest on the assumption that the major economies continue to manage the coronavirus pandemic without slamming the brakes on activity again.
In line with our view that risky assets will continue to recover over the coming months, we think that credit spreads will fall further. This is because we expect the global economy to continue to rebound, which should be supportive of risky assets more generally.
In addition, there is still plenty of room for spreads to decline against a backdrop of exceptionally loose monetary policy, direct purchases by central banks and an ongoing hunt for yield.
For equities, we continue to think that the ex-US markets will outperform the S&P 500.
This is because the former has higher weights in sectors like consumer discretionary, energy, materials and financials, which we think will fare better as economic activity slowly normalises.
In fact, these sectors were also among the best performing between mid-March (when markets bottomed) and mid-June (when the number of cases in the US started to rise sharply again, prompting fears of renewed lockdowns).
During this period of lockdowns, restrictions were gradually lifted in most countries and activity started to recover, which is what we expect to happen in the remainder of this year.
What's more, the possibility that a Democratic 'clean sweep' could lead to higher corporate taxes is a key downside risk to US equities and increased risk aversion in the short term.
We neutralise our tactical underweight to equities (0%) and reduce our tactical underweight income assets (-1%).
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