Calibrating portfolios in transformative times
We are near risk-off in our portfolio strategy.
Transformative times are what we live through today and for the foreseeable future. The catalysts are the same — geopolitical strategies are being played out across all regions while, at the same time, the world continues to march towards 2050 climate targets. All this is happening in an environment of non-stop rapid creative destruction.
Simultaneously, central banks—who miscalculated the inflation outlook—are now desperately trying to figure out ways to get inflation under control. There are many central banks that have raised policy rates this year, including Australia, Brazil, Chile, India, Israel, Norway, New Zealand, the UK, and the US (as of May 2022).
“It is a very difficult environment to try to give forward guidance 60, 90 days in advanced, there are so many things that can happen in the economy and around the world. We are leaving ourselves room to look a the data and make decisions as we get there.”
— US Fed Chair Powell, May 4, 2022
Blunders are widespread as short-sighted, myopic government strategies and policies, coupled with inept central bankers, continue to fail to take a holistic approach to address their challenges. The global economy will continue to face multiple strong headwinds, whether it’s the zero covid policy in China, the war in Ukraine, or the desperate attempt by most central banks to put a lid on inflation, which we believe will be a failed mission unless supply-side factors improve.
With these challenges on top of our risks list, growth deceleration has moved from the number four slot to number one. We believe the slowdown in economic activity will be faster than forecasted and quicker than what markets are currently pricing. The other risks on our top five risk list include Policy Error, Inflation, Geopolitics, and Climate Events, in that order. Regarding the growth outlook, the US and China’s economies are to watch. While fiscal and monetary policy has become headwinds to growth in the US, the opposite is taking place in China. China’s monetary policy is strongly dovish, with various policy rate cuts announced this year and news of another sizeable fiscal policy initiative focused on infrastructure buildup.
“Infrastructure is the bedrock for economic and social development. It is essential to coordinate development and security and optimize the layout, structure, function, and development mode of infrastructure to develop a modern infrastructure system, thus laying a solid foundation for fully building a modern socialist country.”
— President Xi, April 27, 2022
Indeed our risk barometer is beginning to look worrying, and our portfolio strategy is nearing risk-off, but we are not there yet.
As a result, our investment strategy and portfolio positioning, while still risk-on, is allocated to defensive parts of equity and fixed income markets.
Investing and managing portfolios in such an outlook requires a much more hands-on, active management style within each portfolio’s total expense ratio constraints. Calibrating our portfolio in this transformative time has been challenging and has required frequent adjustments to our tactical asset allocation.
Our tactical asset allocation strategy is to remain selectively invested. While there are multiple headwinds and elevated uncertainty and growth is expected to decelerate, there is nevertheless growth. In addition, we expect major central banks to begin to soften the hawkish rhetoric as economic activity data begin to show a faster than expected slowdown. This should help support and lift risk-on assets. However, given high levels of uncertainty, we took some of the year-to-date portfolio outperformance to put in place a partial hedge overlay for our equity allocation.
Our cash position has moved to a slight overweight. In fixed income, we have further reduced the underweight by adding an allocation to China government bonds funded by a reduction in high yield.
In equities, we further reduced EU allocation. Our key overweight remains in the US, Switzerland, Canada, and Latin America. Equity sector positioning has become more defensive as we have taken an overweight allocation to the utility sector. Equity factor and style bias remains unchanged with our preference for value, quality, and large-cap.
In commodities, we remain overweight on gold which unfortunately has been sliding recently and dropped about two percent in April and is now up just under 2% year to date. We also hold an overweight in agriculture which has had a solid year to date performance.
In currencies, we maintain our positive USD view, which has been in place since June of last year. The USD index gained over six percent in 2021 and is up over eight percent year to date.
See our asset class views.
1 Creative destruction – Creative destruction is a term that was coined by the Austrian-born Harvard University professor and political economist Joseph Schumpeter (1883-1950). It refers to the constant product and process innovation by which such innovation replaces old and outdated ones.
The information provided herein constitutes marketing material, that may contain general information, and has been prepared by personnel in the GMG Investment Solutions SA or GMG Institutional Asset Management SA (collectively “GMG”) and is not based on a consideration of the prospect’s circumstances. This document reflects the sole opinion of GMG or any entity of the GMG Group and it may contain generic recommendations.
Non-Reliance: This document does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your circumstances and, if necessary, seek professional advice. GMG is not soliciting any specific action based on this material it is solely intended for illustration purposes.
This document is not the result of financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association.
This document is neither a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other exchange or regulated trading facility in Switzerland, nor a simplified prospectus, key investor information document or prospectus as defined in the Swiss Federal Collective Investment Schemes Act. Any benchmarks/indices cited in this document are provided for information purposes only.
The accuracy, completeness, or relevance of the information which has been drawn from external sources is not guaranteed although it is drawn from sources reasonably believed to be reliable. Subject to any applicable law, GMG shall not assume any liability in this respect.
Risk Disclosure: This document is of a summary nature. The products referred to herein involve numerous risks (including, without limitations, credit risk, market risk, liquidity risk and currency risk). In respect of securities trading, please refer for more information on such risks to the risk disclosure brochure “Risks Involved in Trading Financial Instruments – November 2019”, which is available for free on the following website of the Swiss Bankers’ Association: www.swissbanking.org/en/home.
Material May Be Outdated: This material is produced as of a particular date. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it. GMG is under no obligation to notify you of such changes and you should discuss this material with your GMG relationship manager to ensure such material has not been updated, modified amended and/or supplemented. The market information displayed in this document is based on data at a given moment and may change from time to time. In addition, the views reflected herein may change without notice. No updates to this document are planned. In the event that the reader is unsure as to whether the facts in this document are up to date at the time of their proposed investment, then they should seek independent advice or contact their relationship manager at GMG.
Information Not for Further Dissemination: This document is confidential and should not be reproduced, published, or redistributed without the prior written consent of GMG.