Fear of further increases in US interest rates and some other looming anxieties culminated in a major equity selloff early this month. However, the broader markets' signals were more constructive: yield curves steepened, breakeven rates ticked up, credit spreads narrowed, and emerging markets assets stabilized; so we decided to buy the dip in equities.
Our overall assessment for the coming months has not changed: we are constructive on the world economy, while acknowledging a number risks (cyclical loss of momentum, impact of monetary tightening, the so-called trade war, etc.). In asset allocation terms, this still translates into:
- Only a small overall overweight in equities, currently favoring defensive global strategies, the US and Japan
- A big underweight in fixed income, with a rather short portfolio duration, tilted in favor of the emerging markets (EM), global inflation-linked bonds (GILB), high yield credit (HY), and investment grade corporate debt (IG) – in that order of preference
- A generally high and stable strategic allocation (SAA) to the broader alternative classes (i.e. infrastructure, real estate, private equity, hedge funds, and insurance-linked strategies); the only exception is commodity producers' equity, which we recently removed from our SAA
- An active preference for the US dollar due to the favorable growth momentum of the US economy and the resulting monetary policy outlook, combined with a passive overweight in EM currencies; the latter results from our positions in EM equity and debt
- Maintenance of high cash reserves for increased flexibility in volatile markets
Ad-hoc investment decisions
That being said, following the recent selloff in global equities and the turbulences in the Italian bond market, LGT Capital Partners (LGTCP) took some ad-hoc tactical decisions last Friday.
- We counter-cyclically redeploy some or our excess cash to modestly increase our overall equity risk following the sharp selloff
- We implement this by (a) rebalancing all equity regions back to the tactical quotas set in September and (b) by implementing the second step in our planned quota increase in listed private equity (LPE, as highlighted in the LGT Beacon last month)
- In the LGTCP portfolios with allocation to regular (thus illiquid) private equity funds, these tactical moves were replicated using equity index futures positions
Specifically, we assess these five topics as follows: read on in the attachment by downloading the LGT Beacon
To subscribe to a weekly newsletter, go to subscriptions.
Note: The next edition of the LGT Beacon is scheduled for mid November 2018.