Global Conservative portfolio outlook, positioning, and attribution as of 9/30/2020
September 30, 2020
- We expect economic recovery and expansion to continue in the U.S., as fiscal support has more than offset aggregate income losses and, thus, we believe provides a bridge for consumption into 2021.
- The recovery has varied across the U.S. economy, but fiscal stimulus has more than offset the income decline from recent job losses and, with an ongoing recovery in wages & salaries, should support continued consumption growth.
- Despite a significant stock market rebound, we believe U.S. equity valuations remain attractive compared to history when adjusted for the record low level of long-term interest rates.
- Internationally, Europe already had a weak economy before the pandemic, in our view, and is now facing renewed pandemic lockdowns, while economic data has shown that Emerging Asia leads other regions in its economic recovery, which should support positive GDP and earnings growth 2020 and 2021.
- While risks remain, we anticipate more economically sensitive equity sectors and regions will benefit from early-phase cyclical tailwinds as earnings growth rebounds with economic recovery.
- Corporate bond yields remain elevated relative to Treasury bonds, and we believe there is room for rates to move higher and for credit spreads to narrow to non-recessionary levels as the economic recovery continues to take shape.
- We have continued to shift away from the relatively defensive portfolio positioning in place at the start of the COVID-19 crisis, while seeking to balance opportunity against ongoing medical, political, and economic risks.
- Since late Q1, we have increased exposures to more economically-sensitive areas of the markets, including adding to Emerging Asia exposure and establishing allocations to U.S. Financials, Industrials, Energy, and small cap equities; and we reduced exposure to less economically sensitive U.S. sectors, like Consumer Staples and Utilities.
- We have moved to an overweight of Emerging Asian equities, which provides exposure to favorable secular trends in the Information Technology, Communication Services, and Consumer Discretionary sectors, while we maintain an underweight to Europe and Japan.
- Within the fixed-income allocation, we retain an overweight to investment-grade corporate bonds and a shorter average duration than the benchmark to manage interest rate risk.
- U.S. TIPS
- Western Europe
- U.S. Real Estate
- U.S. Small-Cap Equities
- U.S. Consumer Discretionary
- U.S. Information Technology