Capital Markets Outlook  |  Q1 2020

Asset Allocations: Reducing equity risk in Q1

With nothing on the horizon to reverse the slowdown in economic growth, we favor reducing equity allocations until there is proof of an earnings recovery.

  Current quarter
  Previous quarter
    Change from previous quarter
Underweight Neutral Overweight
U.S. large cap
U.S. small cap
U.S. value
U.S. growth
Emerging markets
Fixed income
U.S. government
U.S. investment-grade corporates
U.S. mortgage-backed
U.S. floating-rate bank loans
U.S. high yield
Non-U.S. developed country
Emerging markets

Currency views

U.S. dollar versus
Favor other Neutral Favor dollar

We have moved to underweights across equity categories

As 2019 drew to a close, the sentiment indicators that we follow pointed to signs of froth. With implied and realized volatility as low as they are across the landscape of risk assets, markets appear to be priced for perfection to start this new decade. We think a prudent amount of caution is warranted while we keep a close eye on the incoming high-frequency macro data over the next month or two.

We are maintaining an underweight to most credit sectors

Equities are not the only highly-priced asset class. High-yield bond valuations measured by credit spreads per unit of leverage on corporate sector balance sheets are in the lowest decile of their historical range. This means investors are being paid next to nothing to own default risk.

We have reduced the commodities underweight, returning to neutral

We believe it is possible that global demand for oil will slow, but the declining number of drilling rigs and signs of slowing supply should bring the oil market into balance. At current levels, the upside and downside risks appear to us to be symmetrical.

Risks have eased, but so has growth

January 22, 2020  |  Capital Markets Outlook

We favor reducing risk as we look for proof that earnings can support asset valuations.

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