Global Conservative portfolio positioning intra-quarter update as of 9/03/2020
Increased the economic sensitivity of U.S. large-cap exposure while reducing the overweight of U.S. large-cap equities to fund an overweight of Asian emerging markets
September 3, 2020
We see continued economic progress in this recovery, which we believe will benefit Industrials companies and present a headwind for the relative performance of Consumer Staples. Additionally, Industrials stocks have lagged substantially year-to-date, while Staples stocks, despite their typically defensive nature, have largely kept pace in Q3’s continued market rally due, in part, to demand factors that we believe will prove temporary. Thus, we see more opportunity looking forward in the more economically-sensitive Industrials sector.
In addition to adjusting sector allocations within the strategy’s U.S. equity exposure, we have reduced our overweight to large-cap U.S. equities as a whole and increased exposure to Asian emerging markets, which we expect to do well as the economic recovery continues. Asia has made significant progress in containing COVID-19 and emerging Asia’s sector mix is favorable, in our view, in the current environment. Even after reducing exposure to large-cap U.S. equities, our U.S. equity allocation remains a significant overweight, but the shift has helped reduce the portfolio’s valuation profile.
We have also taken this opportunity to rebalance the portfolio.
Increased economic sensitivity of U.S. sector exposure: We have added to the portfolio’s large-cap U.S. Industrials equity allocation. We are seeing a pickup in economic activity that we believe should benefit Industrials, e.g., improved machinery orders, increased shipping activity, and strong consumer spending on durable goods. Cost cutting should enhance the cyclical earnings recovery for Industrials, in our view, and new fiscal stimulus and/or a post-election infrastructure bill could offer further upside. Industrials should have some of the strongest U.S. sector earnings growth amongst all U.S. sectors in 2021, which, along with a market-like valuation, makes the sector increasingly attractive, in our view, at this stage of recovery.
We have trimmed the portfolio’s large-cap U.S. Consumer Staples equity allocation. The pandemic has created an unprecedented jump in demand for various Consumer Staples products, which we believe is likely to reverse when consumers feel safer and resume leisure activities like dining out and travel. Despite defensive characteristics, Consumer Staples had strong Q3 returns supported by positive earnings, but now elevated investor expectations could set up the sector for disappointing results going forward.
Moved to an overweight of Asian emerging markets funded by a reduction of the U.S. overweight: We have increased the portfolio’s allocation to Asia ex-Japan equities. Emerging Asia has largely contained Covid-19 and could post positive GDP and earnings growth in both 2020 and 2021, while most other regions are expected to see GDP and earnings declines in 2020 with mixed results in 2021. Sector mix in emerging Asia is favorable from a cyclical and secular perspective, in our view, with large weightings of Tech, Comm. Services, and Financials, that trade at a discount to U.S peers.
We have reduced the portfolio’s overall allocation to large-cap U.S. equities proportionally across our updated sector exposure targets. U.S. equities have rebounded more quickly than other regions, and trimming U.S. large-cap exposure to fund increased emerging Asia exposure reduces overall portfolio valuation, but we still view our U.S. exposures favorably and maintain a substantial overweight of the U.S.