Global Balanced portfolio positioning intra-quarter update as of 3/18/2020
Adjusted U.S. equity sector allocations and added to Asian equity exposure in light of ongoing COVID-19 outbreak impacts
March 18, 2020
We have reduced the expected economic sensitivity of the Global Balanced portfolio by decreasing exposure to the U.S. Consumer Discretionary and Information Technology equity sectors and increasing exposure to the U.S. Utilities, Consumer Staples, and Health Care equity sectors. Regardless of the severity and duration of the economic impact from the COVID-19 outbreak (including shifting trends in consumer and business spending as well as government policy responses), we anticipate Information Technology and Consumer Discretionary companies will face relatively greater fundamental headwinds than companies in traditionally more defensive sectors. Yet, to date in this crisis, Tech and Discretionary equities have generally performed in-line with the broader market. We anticipate investors will become more discriminating as the situation evolves.
Additionally, we have added to Asia ex-Japan equity exposure, funded by a modest reduction in our significant U.S. equity overweight. While Asia has been at the epicenter of the COVID-19 crisis, we believe it is also farther along managing the outbreak than Europe or the U.S., and is beginning to see a reduction in economic uncertainty.
U.S. equity sector allocation adjustments to reduce economic sensitivity: While U.S. Consumer Discretionary and Information Technology equities have declined roughly in-line with the U.S. equity market as the COVID-19 crisis has unfolded, we anticipate these sectors will face stronger and more long-lasting economic headwinds as a result of the policy, business, and consumer responses to the outbreak. Consumer Discretionary stocks are likely to face ongoing pressure from reduction in consumption of big-ticket items, travel, and recreation tied to labor market impacts and social distancing. Information Technology firms will likely face negative revenue and earnings impacts from COVID-19 tied to supply chain disruptions as well as reduced business investment and consumption tied to economic uncertainty. Sectors providing more staple goods and services, including Consumer Staples, Health Care, and Utilities should see less significant and less sustained negative impact from the economic headwinds of COVID-19.
Increase of Asia ex-Japan equity exposure: Asian stocks were hard-hit early in this crisis by fears and some of the first economic impacts of COVID-19 (and related policy responses). Now, however, Asia is showing early signs of stabilization in managing the COVID-19 outbreak, relative to Europe and the U.S., as Asian companies and consumers appear to be adapting to the situation and resuming productive activity. While the global outlook remains uncertain, we believe these factors reduce the relative risk of Asian equities, and that a reduction of our underweight to the region is warranted. The increase in Asian equity exposure was funded by a modest reduction in our overweight of U.S. equities, but portfolios maintain a substantial overweight to the U.S., particularly in less economically-sensitive sectors. We believe the relative economic strength and fiscal position of the U.S. makes it one of the best-positioned countries to manage the impacts of the COVID-19 crisis from an economic and fiscal perspective.