Global Conservative portfolio outlook, positioning, and attribution as of 9/30/2022
September 30, 2022
- With the rapid evolution of this economic cycle, deterioration in some economic data along with the Fed’s aggressive monetary policy stance point to later-cycle economic conditions here in the U.S. and abroad, in our view.
- Some areas of the global economy remain sound, such as the U.S. labor market and services consumption, but we see little chance of a resumption of rapid and dynamic economic growth given the progress of the cycle to date and ongoing tightening of financial conditions.
- In this evolving environment, we see increased risk to corporate earnings and, more broadly, to the performance of particularly economically sensitive parts of the markets.
- Internationally, as global economic growth slows, we see risks mounting for Europe tied to the war in Ukraine, and we expect headwinds for economically cyclical emerging markets, while developed Asia is a relative bright spot.
- While risks to equities have increased, risks to fixed income have diminished, in our view, following the sharp rise in interest rates this year, as slowing economic growth and a likely easing of inflation should reduce upward pressure on intermediate and longer-term interest rates, and a Fed-induced slowdown could ultimately push down longer-term interest rates.
- We are avoiding early-phase cyclical U.S. sectors and, instead, are emphasizing sectors that we expect will see less deceleration in earnings and less margin degradation as economic growth slows.
- We have increased exposure to late-phase, defensive U.S. sectors by establishing overweight allocations to Consumer Staples and Utilities, while also maintaining an overweight of the Health Care sector.
- We remain underweight to international equities, as a whole, including underweights of Europe and emerging markets, but we maintain an overweight of developed Asia, where we see the greatest potential for economic resilience abroad.
- Seeing reduced risk to fixed income returns, and late economic cycle risks to equities, we have shifted to a modest overweight of fixed income within balanced portfolios and, within fixed income, we have also reduced our overweight of corporate credit and added floating rate Treasury exposure.
- Fixed Income
- Western European Equities
- U.S. Consumer Staples Equities
- Long-Term Bonds
- U.S. Communication Services Equities
- Short-Term Fixed Income Securities
- U.S. Energy Equities