Global View Asset Allocation Strategies
July 12, 2017
The Global View Global Asset Allocation model reduced its appetite for risk to start off the third quarter with overall equity and fixed income exposures moving to neutral and no exposure to cash.
As the first half of 2017 fades in the rear-view mirror, investors looking back can recall crashing oil prices, near record partisanship in Washington D.C., and increasing tension in the Middle-East and Asia; all against a backdrop of suppressed volatility across numerous asset classes. Beginning the third quarter of 2017, the model is positioned more cautiously, having reduced equity and increased fixed income, considering the following conditions:
- Elevated investor complacency
- Reduced accommodation from central banks and higher bond yields
- Rising geopolitical tensions
- Global growth below historical norms but remaining on solid footing
As the overall Stock/Bond/Cash allocation transitioned to neutral weightings, the regional equity positions also changed:
- The U.S. moved from neutral to overweight
- The U.S. moved from neutral to overweight
- The allocation to Canada remained at zero
- Japan moved from underweight to overweight
- Europe ex. U.K. remained overweight
- The U.K. moved from overweight to underweight
- Emerging Markets remained underweight
- The allocation for Pacific ex. Japan moved from overweight to zero
The U.S. upgraded from neutral to overweight, fueled by an improving technical picture. Improvements in the technical model were sourced from a new bullish reading from relative price momentum, as U.S. stocks had a consistent climb amid low volatility during the second quarter. The macroeconomic and sentiment picture remained bearish, with valuations posing the biggest risk to the cyclical bull market.
Canada entered the third quarter with zero allocation after having been at zero for the prior three months. Both the technical and fundamental/macroeconomic models for Canada are at bearish levels, with most of their indicators displaying bearish readings. The fundamental/macroeconomic model is at its lowest level in four years.
Japan indicators transitioned from bearish to bullish in the latter part of the second quarter, moving the region to an overweight position to open the third quarter. A strong bullish reading from the technical model, with all but one indicator bullish, was bolstered by a modest increase in the fundamental/macroeconomic model, as sentiment (a contrarian indicator) reversed from recent lows to turn bullish.
Europe ex U.K. exposure increased into the third quarter, moving further overweight. The technical model deteriorated slightly from very bullish to bullish due to the ACWI Scorecard Technical Rank indicator switching from bullish to bearish. The slightly cooler technical picture, however, was outweighed by improvements in the LEI and sentiment indicators in the fundamental/macroeconomic model.
The U.K. position fell from mildly overweight to a zero allocation during the second quarter, but it has since improved to modestly underweight at the start of Q3. The technical model dropped to neutral, offsetting the improvement of the macroeconomic/fundamental model, as sentiment moved from bearish to bullish.
Emerging Markets remains underweight. The price-based model remained bullish throughout the second quarter. However, deteriorating valuations moved the macroeconomic/fundamental model to its second-lowest possible reading, with 4 of 5 indicators bearish.
Although Pacific ex. Japan began the second quarter with an overweight position, steady indicator deterioration led the model to a zero allocation to start the third quarter. The technical model and the fundamental/macroeconomic model combine to form the second lowest overall regional model reading, surpassing only Canada.
The U.S. equity model moved to favor large-cap stocks over small-cap stocks. The model continues to favor Growth over Value.
While U.S. equities have been maintaining upward momentum, history has shown mature bull markets tend to favor large-cap stocks. This is evidenced by all fundamental/macroeconomic cap model indicators favoring large-caps, while price-based indicators are evenly split between large- and small-caps. Reflecting the strong relative trend of Growth vs. Value, the model continues to favor Growth. Price-based indicators remain in near unanimous support of Growth stocks, though the rapid increase in prices has stretched valuations, flipping the net-dividend yield indicator to favor Value.
Bottom Line: As seasonal trends tend to favor bonds over stocks during the later summer months, we are watching for an abatement in global sentiment and continued economic growth for opportunities to increase equity exposure. The Global View Asset Allocation strategy relies on the dispassionate, quantitative evaluation of market and macroeconomic indicators, and until the weight-of-the-evidence favors equities or bonds, our allocations will reflect neutral top-level asset class positioning.
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