Global Asset Allocation Update

by: Columbia Threadneedle Investments

By Columbia Threadneedle Investments Global Asset Allocation Team

Global Asset Allocation Outlook

Overall Allocation

Equity: The overarching message from our work remains consistent with a moderate underweight. Our economic investment clock has moved more deeply in contraction and many of our market-based indicators suggest ongoing caution. While equity markets have rallied sharply over the past few weeks, an upgrade to neutral is not timely at this point and we remain modestly underweight equity.

Fixed Income: While the overall duration framework remains negative, two developments argue for an upgrade to fixed income. First, the fact that negative yields are taking hold across the world calls into question the very definition of "low" rates. In light of not only plummeting yields but also plummeting inflation expectations, it is increasingly difficult to consider U.S. yields as unequivocally "low." The second development is the return of negative correlation to equities which had been sorely missing last year. More recently, duration risk has provided reliable diversification benefits on equity down days. As a result, we have moved to an overall neutral positioning in fixed income.

Alternatives: We maintain our overweight for alternative investments in light of a weak outlook for stocks and as a hedge against less diversification efficacy from bonds. Alternative investments seek to provide sources of return that are not solely dependent on the direction of traditional stock and bond and provide attractive diversification benefits. Recent strength in alternative beta performance may signal renewed dependability for factor based strategies.

Within Equity Allocation: Country allocation views have not been lucrative of late, so they are not emphasized in our current tactical strategy. Some concerns over financials and peripheral Europe are important to monitor. We are currently positioned neutral across developed markets. Emerging market overweight is beginning to look more interesting in light of improved relative performance. For now, we leave the EM Asia overweight intact. From a size perspective, we continue to maintain an underweight to small cap equities.

Within Fixed Income Allocation: With respect to rates, we are upgrading Treasuries to neutral and we believe that maintaining a moderate underweight on non-U.S. developed bonds makes sense. We remain overweight high yield as a substitute for equity risk, but we are monitoring the macro backdrop closely as the seasonal strength in high yield has been noticeably absent. By increasing portfolio duration through higher quality bonds such as Treasuries in the context of our overweight to high yield, we have reduced investment grade to a neutral position from overweight to balance our overall portfolio duration. Other sectors are mixed and we are positioned with a modest overweight to TIPS and an underweight securitized bonds.

Disclosure: None.


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