Asset Allocation

Markets are pricing a return to a neutral policy stance for the major central banks within the next 12 months. However, recession risks still loom amid slowing growth. We unpack where recession risks are underappreciated and what it means for bond positioning.

MacroQuant’s US equity z-score is dangerously close to the -1 threshold. Moves below that threshold have reliably coincided with equity bear markets in the past. As such, MacroQuant recommends an underweight on stocks, offset by an overweight on bonds and cash.

Investors should modestly underweight equities in their portfolios and look to turn more aggressively defensive once the whites of the recession’s eyes are visible. We think that will happen within the next few months.

The EM EPS recovery has been narrow, solely driven by TMT stocks in China, Korea, and Taiwan. EM corporate profits are set to contract in the next six to nine months. Unlike in the past, US dollar weakness will be deflationary, not reflationary, for EM share prices.

In our Beta report, we focus on our decade view. Many of our global allocator clients are scrambling to incorporate geopolitics into their strategic asset allocation. For most, this means thinking about war… or about future end-states. This is a mistake. We consider the next five years (maybe a decade) as the transition to the new era, a transition away from American unipolarity. And the transition itself is investment relevant. A transition to a multipolar world – which we think is occurring – will crush the USD and favor non-US assets. A transition to a bipolar world – not our base case, but still possible – would do the opposite.