Global View Asset Allocation Strategies
April 12, 2017
The Global View Global Asset Allocation model remained bullishly positioned beginning the 2nd quarter with overall equity exposure overweight, fixed income underweight and no exposure to cash.
Investors began the first quarter of 2017 by greeting a new U.S. administration with bullish enthusiasm for stocks that carried over from the November presidential election. By the end of March, however, investors’ high hopes of significant infrastructure spending and a redesigned U.S. tax code were tempered as the new administration stumbled tackling its first significant policy overhaul to repeal/replace the Affordable Care Act. Coupled with a Fed embarking on what is expected to be a lengthy interest rate tightening course, equity markets ended the first quarter pausing to take a breather but with bullish trends still intact. At the start of the second quarter of 2017, the model is positioned to benefit from the following conditions:
- Likely global earnings growth recovery
- Secular bull tailwinds
- Reduced risk of global recession
- Expectations of acceleration in global economic growth for 2017
The overall Stock/Bond/Cash allocation remains in favor of equities; however, regional equity positions have changed:
- The U.S. downgraded to neutral
- The allocation to Canada moved from overweight tozero
- Japan moved from overweight tounderweight
- Europe ex. U.K. moved from underweight tooverweight
- The allocation to the U.K. moved from zero tooverweight
- Emerging Markets remained underweight
- The allocation for Pacific ex. Japan moved from zero to overweight
Although the U.S. began the year in an overweight position, deterioration in the technical model caused the overall model reading to turn neutral. The macroeconomic and sentiment picture remained bearish, with valuations as the biggest risk to the cyclical bull.
The model for Canada suffered in the first quarter, moving the allocation from a strong overweight position to zero. Deteriorating price momentum and breadth caused the technical model to downgrade from very bullish to bearish. Very bearish readings from the fundamental and macroeconomic model, which is at its lowest reading in four years, helped to close out the Canada position.
Japan’s model gradually deteriorated during the first quarter, shifting the region from overweight to underweight. The model’s reading during the month of March reached its lowest level in five years. Five of the seven indicators in the technical model are bearish. The earnings yield indicator fired a sell signal, shifting the macroeconomic and sentiment model from a bullish reading to a bearish reading.
The Europe ex U.K. model improved from underweight to mildly overweight over the past quarter. The technical indicators for the region are giving a moderately bearish reading, with just two out of six indicators on a bullish signal. The macroeconomic and sentiment model is neutral, improving from bearish due to a reversal in sentiment and improvement in economic indicators.
The U.K. model shifted from a zero allocation to an overweight position over the past quarter. The technical model is giving a bullish reading, with the price trend indicator improving from bearish to neutral. The macroeconomic and sentiment model has held constant with its neutral reading.
Emerging Markets remains underweight. The price-based indicator readings are mixed with no strong price trend in the past quarter. The majority of macroeconomic and fundamental indicators are giving a bearish reading as well, contributing to the region’s underweight allocation. The outlook for Emerging Market performance is sensitive to the composition and policy direction of the Trump administration.
Although Pacific ex. Japan began the year with a zero allocation, the model quickly began to pick up on indicator improvements in both the technical as well as the macroeconomic and fundamental indicators to shift the position to overweight. Price-based indicators are painting a moderately bullish picture, while the macroeconomic and fundamental model is giving a very bullish reading.
The U.S. equity model continues to favor small-cap stocks over large-cap stocks. The model moved to modestly favor Growth over Value.
While the small-cap rally has tempered somewhat and price-based indicators are more evenly split between small-caps and large-caps, fundamentals and macroeconomic indicators continue to favor small-caps. In line with improving economic expectations and Q1 EPS growth, the model shifted to favor Growth over Value to start the second quarter. Price-based indicators exhibit near unanimous support for Growth stocks while less responsive macroeconomic indicators maintained a Value bias.
Bottom Line: Due to high correlations, we are watching Financials as a barometer for where global equities will go next. As a new U.S. administration finds its footing, central banks seek to normalize their policies, and new macro trends develop, the Global View Asset Allocation strategy relies on the dispassionate, quantitative evaluation of market and macroeconomic indicators. As long as the weight- of-the-evidence continues to favor equities over bonds, so too will our allocations.
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