Asset Allocation re-balance: Dec Qtr

About the author:

Andrew Tang
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.

Risky assets

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%).

Find out more

Morgans clients can access further analysis by viewing our latest Asset Allocation report. If you would like access or more information, please contact your adviser or nearest Morgans office.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

Disclosure of interest: Morgans may from time to time hold an interest in any security referred to in this report and may, as principal or agent, sell such interests. Morgans may previously have acted as manager or co-manager of a public offering of any such securities. Morgans affiliates may provide or have provided banking services or corporate finance to the companies referred to in the report. The knowledge of affiliates concerning such services may not be reflected in this report. Morgans advises that it may earn brokerage, commissions, fees or other benefits and advantages, direct or indirect, in connection with the making of a recommendation or a dealing by a client in these securities. Some or all of Morgans Authorised Representatives may be remunerated wholly or partly by way of commission.

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