Calibrating portfolios in transformative times

10 May 2022
Newsletter by GMG Asset Management
Reading time: 4 minutes

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[1].

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.

Data source: IMF, ‘April World Economic Outlook’. Chart by Geneva Management Group. Data as of May 09, 2022.

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. 

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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.

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