The U.S. dollar has been stubbornly strong. In the absence of decisive fiscal policy, doubts are growing about the effectiveness of looser monetary policy worldwide, as negative interest rates and balance sheet expansion may be approaching their limits at the European Central Bank (ECB) and the Bank of Japan (BoJ). Some $17 trillion of debt trades with negative yields, which is accommodative up to a point, but eventually begins to stifle rather than stimulate investment, while also depressing bond market returns. Geopolitical tensions have risen in the Middle East, and the U.S. is about to enter a bruising election year.
While the asset allocation committee maintains its view that a U.S. or global recession is unlikely before the end of 2020, late-cycle dynamics are making themselves felt, and we think the risk of market dislocation is rising. This led us to a broadly lower risk profile in our views at the asset class and regional level. This translates to a preference for interest rate risk over credit risk and for UK and Japanese equities.
The committee judged the outlook to be broadly balanced, weighing risks to the downside equal in scope and scale with those to the upside. Accordingly, the committee moved to ensure portfolios were not over-exposed to those areas of investment heavily reliant on sustained high and rising levels of economic growth. Specifically, we felt it prudent to trim an overweight in emerging market economies (EME) by moving back toward the neutral position. The committee remains comfortable with material investment in EME in the long-term and may look to re-establish an overweight as the outlook improves or, should the outlook deteriorate, as and when valuations are more compelling. Corresponding with a decrease in EME, the committee moved to increase equity exposure in Japan. Japan’s economy has stabilised following close to two decades of malaise. We believe that Prime Minister Shinzo Abe’s package of reforms, allied with strong electoral support for those reforms, will underpin further progress in the medium term. An increase in Japanese equity exposure serves two further purposes. It helps to maintain our overall equity content at what we consider to be the appropriate level given the balance of risks, and it secures weightier exposure to the Japanese yen. The committee considers that the yen’s ‘safe-haven’ status – given to assets with a tendency to appreciate in value during periods of stress in broader markets – will add further resilience to the portfolios.
Steve Williams, Independent Chair
Asset allocation in detail
Weighting to asset classes where we have a neutral view will be in accordance with our long term strategic asset allocation.
Tactical asset allocation committee members
Our tactical asset allocation committee is made up of an independent chair and Parmenion Investment Management representatives. A full list of the committee members is below:
Steve Williams
Simon Brett
Peter Dalgliesh
Tom Sayers
Tim Willis
Jasper Thornton-Boelman
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