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Monthly Investment Outlook

Monthly Investment Outlook

We publish a Monthly Investment Outlook that highlights our convictions on equities and bonds, as well as recent asset allocation changes.



Summary

  • MONTHLY INVESTMENT OUTLOOK - Preparing for the start of a ‘mini-cycle’
  • GLOBAL TACTICAL ASSET ALLOCATION - Proactive risk management is key in mini-cycles
  • UBP ECONOMIC OUTLOOK - Consumption to drive the recovery
  • UBP ECONOMIC OUTLOOK - H2-21 Outlook: Maturing recovery in developed countries
  • GLOBAL BONDS - Rise in real rates could drive the next leg up in yields
  • GLOBAL EQUITIES - Preparing for more nature phase
  • RECENT VIEW CHANGES - Reducing slightly equities and adding carry

  • The recovery phase of the US economic cycle is increasingly mature and looks set transition to its next phase in the coming months, a ‘mini-cycle’, similar to the long expansions of the 1990s and in the post-Global Financial Crisis era.
  • These ‘mini-cycles’ have typically coincided with shifts in US Federal Reserve policy that we expect to see in the coming quarters. Typically lasting 4-5 quarters, such minicycles result in key shifts that occur within fixed income, equity and risk markets.
  • During recovery phases, credit spreads tend to compress from their recovery phase peaks. In ‘mini-cycles’ they tend to widen, jeopardising investor returns. As a result, we have begun shifting our credit exposure towards Senior Loans which offer comparable coupons, though sit higher in the capital structure and provide shelter against any potential policy rate changes.
  • In equities, the relatively high return and declining volatility of the recovery phases gives way to a comparatively modest (though usually positive) return with increasingly volatility. This is a backdrop where investors can benefit from an increased stock-selection (alpha) rather than market focused (beta) bias.
  • Indeed, we have been increasing our stock selection focus with a concentration on ‘quality’ via visible earnings prospects combined with durable valuation floors. Entering Q2 earnings season, the de-rating of large cap tech stocks back to pre-pandemic levels, together with a possible cyclical upside surprise in earnings, could represent such a combination.
  • As importantly, these mini-cycles going back to the early- 1990s, have tended to coincide with an increase in volatility and shocks including the Mexican Crisis (1994), Asia/Russia Crises (1997-98), the Eurozone Crisis (2011-12), and the US high yield energy defaults (2015).
  • As a result, pro-active risk management is an increasingly valuable assets in the mini-cycle phase of the economic cycle. In light of the modest domestic policy tightening that has emerged in China in the first semester, combined with the prospect of a mini-cycle in the US, we are trimming our overweight position in China in order to moderate our overall risk exposure within portfolios.
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