Global Asset Allocation Views – Q1 2018

Global Asset Allocation Views – Q1 2018

Last year turned out a lot quieter than many pundits had expected going into the year.  The markets brushed off any potential geopolitical turmoil surrounding North Korea, Brexit, and trade wars with China.  There were only eight days when the market was up or down more than 1% and there were zero times where the market was down 3% from top to bottom!  The last time there were no drops of 3% in a year was 1995.  We are currently in the midst of a secular bull market similar to the one in the 90s and very similar to the year 1995.  Back then the market rallied another 155% before topping out four years later in March of 2000 during the tech bubble and ensuing crash.  I still believe we have some room to run and that we are currently in the earnings growth phase of this bull market.  We view any pullbacks as an opportunity to add to equities.

Key Positives:

  • Many valuation metrics are still within 1 standard deviation of their historical average
  • European and Emerging Market earnings, after bottoming out in early 2016, continue to shine heading into 2018
  • The recent corporate tax cuts into a low-rate environment continue to support equities.

Key Themes:

  • We continue to support Equities over Fixed Income due to the continued global expansion and the impact of rising rates on Fixed Income prices
  • Within Equity we favor International over Domestic due to cheaper valuations, and better growth potential.
  • Within Fixed Income we favor Emerging Market Debt over Treasuries and Mortgage-Backed Securities due to a weakening dollar and stronger Emerging Market current accounts and balance sheets.

Key Risks:

  • Too much fiscal stimulus into an already strong domestic economy may cause overheating, higher than expected inflation, and increased monetary tightening.
  • Domestic valuations are still on the higher end and if earnings growth does not keep up, even with tax cuts, markets may take an unexpected hit.
  • Geopolitical concerns will always be a problem that cannot be predicted. These are some of the ones to keep an eye on:
    • Potential end to NAFTA
    • Trade war with China over North Korea
    • North Korea continuing to threaten the U.S. and its allies
    • Ending the Iran nuclear deal
    • Brexit negotiations, specifically over a hard border in Ireland
    • Catalonia’s push for secession from Spain
    • Elections in Mexico – frontrunner is far-left and very anti-Trump
    • China’s exertion in the South China Sea
    • Potential regime changes in Brazil and South Africa

 

ASSET ALLOCATION VIEWS

 

EQUITIES
Large Cap (Growth) Momentum Overweight
Large Cap Value Slightly Overweight
Large Cap Dividend Growth Neutral
Mid Cap Neutral
Small Cap Neutral
Europe Overweight
Asia Pacific Slightly Overweight
Canada Neutral
Developed Small Cap Overweight
Emerging Markets Slightly Overweight
FIXED INCOME
U.S. Treasuries Underweight
Investment Grade Corporate Debt Slightly Overweight
Mortgage-Backed Securities Slightly Underweight
High Yield Debt Neutral
Emerging Market Debt Overweight

 

Asset Class View Change Rationale
Large Cap Value Neutral to Overweight Underappreciated area of the market that still has room to run; began to see relative outperformance at the end of 2017
High Yield Debt Overweight to Neutral Spreads continue to tighten making this area expensive and with less potential upside
   
Written by Antonio Belmonte

 

   

These are the opinions of Antonio Belmonte and not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice. Investing involves risk. Depending on the types of investments, there may be varying degrees of risk. Investors should be prepared to bear loss, including total loss of principal. The strategies discussed herein are not designed based on the individual needs of any one specific client or investor. In other words, it is not a customized strategy designed on the specific financial circumstances of the client. However, prior to opening an account Cambridge will consult with you to determine if your financial objectives are appropriate for investing in the model. You are also provided the opportunity to place reasonable restrictions on the securities held in your account