Asset Allocation

Several tail risks appear less ominous compared to last month. Nonetheless, the earnings outlook has not improved and the FOMC will turn more hawkish ahead of the June meeting. Stay defensively positioned.

Several tail risks appear less ominous compared to last month. Nonetheless, the earnings outlook has not improved and the FOMC will turn more hawkish ahead of the June meeting. Stay defensively positioned.

Risk assets are stuck in a range driven by the Fed feedback loop. But the current rally may continue for another quarter or two.

There are a number of warning signs that the global and EM equity bounce is unsustainable. The latest episode of housing recovery in China will prove temporary due to still-large imbalances. Overweight Indian stocks: the credit cycle in India is less vulnerable compared to other EMs. However, the outlook for Indian equities in absolute terms is not bullish.

The RMB has moderated considerably since mid-last year, which should lead to improved capacity utilization and easing PPI deflation. There is a strengthening case for an upswing in China's profit cycle, driven by falling interest rates and a weaker RMB, while investors are ill-prepared for any positive earnings surprises.

For the month of March, the model outperformed both global and U.S. equities in U.S. dollar terms. For April, the model has further pared back its equity risk exposure, shifting the allocation into cash. While Europe remains the largest equity overweight, there was a modest recalibration to defensive markets such as the U.S. and Switzerland. The allocation to EM was also nudged up a bit, on momentum and valuation grounds. In the fixed-income space, the model is sticking with U.S., Italian and Spanish paper.

The British pound may be prone to further weakness in the coming months as the odds of a Brexit rise.

Lower oil prices are aggravating financial and social stress in poorer OPEC states, particularly in Venezuela, where the government recently executed a gold-for-cash swap ahead of looming debt payments.

Within the EM equity space, country effects still significantly overwhelm sector impact. In turn, the importance of country selection within advanced countries has dropped. Macro analysis is still very pertinent with respect to adding alpha when investing in EM stocks. At this moment, the macro outlook does not warrant a bullish stance on EM.

The Fed's recent dovishness represents an acknowledgement of the feedback loop between Fed policy and financial conditions. Expect Fed hawkishness to ramp back up prior to the next rate hike, likely in June.