Investment Clock insights

Multi Asset update


Trevor Greetham 

13 March 2020

The Global Multi Asset Portfolios (GMAPs) went into the coronavirus crisis with a positive position on equities in view of broadening signs of recovery in the world economy early in 2020. Stock markets dropped sharply as counter measures to slow the outbreak represent a sudden decline in economic activity and uncertainty over both the depth and duration of the crisis is high. We have managed equity exposure lower, buying during the initial sharp sell-off and selling again after the Fed’s emergency interest rate cut a week later when markets bounced. Since then we have generally been selling rallies but we retain a small overweight in stocks as investor sentiment is extremely depressed – more so than in the Lehman crisis of 2008 according to RLAM’s proprietary indicator (chart 1); valuations are more attractive; and a broad range of stimulus measures has been announced.

 

Chart 1

We have been consistently underweight commodities which was a benefit when the oil price plunged on supply disagreements between Russia and Saudi Arabia. We remain overweight high yield bonds, particularly short duration high yield, as we expect the asset class to be more resilient than stocks over a temporary period of economic weakness. We remain broadly neutral on UK commercial property where we have seen diversification benefits relative to equities. We remain overweight US equities (including the tech sector) given the relatively defensive nature of the market and Emerging Markets, potentially a safer haven as the virus appears to be under control in China and dollar weakness is a positive. We are underweight UK equities, a long term underperformer hampered by a heavy resource sector weighting. We are overweight the Japanese yen, typically a ‘risk-off’ currency, and sterling, where the UK’s coordinated approach to coronavirus stimulus has impressed, while remaining underweight the economically-sensitive Australian dollar.

We will continue to manage risk over this volatile period by selling rallies and buying again when sentiment is depressed. We may not yet have seen the low in equity markets as signs of the virus spreading outside of China are likely to dominate the news. However, we expect a sharp recovery in later in the year when shuttered parts of the world economy are re-opened and consumer confidence picks up again.

 

Our positive starting position in equities means the GMAPs have underperformed their benchmarks during the first stage of the coronavirus shock but our investment process has weathered difficult markets before and did well over the 2007-9 Global Financial Crisis. We expect this shock to be more short-lived, with an eventual strong bounce back in economic activity that could see the Investment Clock ending the year back in equity-friendly Recovery (see chart 2). A disciplined and active approach to tactical asset allocation will be crucial over this unprecedented and troubling period.

 

Chart 2: Investment Clock with base case coronavirus impact shown


 

Chart 1

 

 

We have been consistently underweight commodities which was a benefit when the oil price plunged on supply disagreements between Russia and Saudi Arabia. We remain overweight high yield bonds, particularly short duration high yield, as we expect the asset class to be more resilient than stocks over a temporary period of economic weakness. We remain broadly neutral on UK commercial property where we have seen diversification benefits relative to equities.

 

We remain overweight US equities (including the tech sector) given the relatively defensive nature of the market and Emerging Markets, potentially a safer haven as the virus appears to be under control in China and dollar weakness is a positive. We are underweight UK equities, a long term underperformer hampered by a heavy resource sector weighting. We are overweight the Japanese yen, typically a ‘risk-off’ currency, and sterling, where the UK’s coordinated approach to coronavirus stimulus has impressed, while remaining underweight the economically-sensitive Australian dollar.

 

 

 

 

 

We will continue to manage risk over this volatile period by selling rallies and buying again when sentiment is depressed. We may not yet have seen the low in equity markets as signs of the virus spreading outside of China are likely to dominate the news. However, we expect a sharp recovery in later in the year when shuttered parts of the world economy are re-opened and consumer confidence picks up again.

 

 

Our positive starting position in equities means the GMAPs have underperformed their benchmarks during the first stage of the coronavirus shock but our investment process has weathered difficult markets before and did well over the 2007-9 Global Financial Crisis. We expect this shock to be more short-lived, with an eventual strong bounce back in economic activity that could see the Investment Clock ending the year back in equity-friendly Recovery (see chart 2). A disciplined and active approach to tactical asset allocation will be crucial over this unprecedented and troubling period.