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