The recent selloff reintroduced caution among investors. For the first time in years, markets are asking for a risk premium for various uncertainties. This is part of a welcome - but at times difficult - normalization. We thus believe our strategy, which combines a modest equity overweight with a defensive and countercyclical bias, remains appropriate.
During the February market panic, we used part of our cash reserve to buy equities in the emerging markets (EM) and the US. The countercyclical action has paid off thus far. Global equities have risen 2.4% since then, led by the EM (+4.1%) and the US (+2.7%). Despite the interim jump in volatility, equities are also trading higher than during our last quarterly tactical asset allocation review (QTAA) in December.
We thus reaffirm the strategy of combining a modest equity overweight with a defensive bias (i.e. elevated cash reverses, avoidance of high-beta investments, broad diversification across asset classes). Our macro view remains constructive, albeit bifurcated. The economic outlook remains underpinned by robust (above-potential) economic growth around the world, with inflation generally appearing to move toward targeted levels in most major economies. However, in such late phases of a growth cycle, investors tend to be more susceptible to exaggerations and herding behavior, which ultimately reduces the quality of investments, increases financial risks, and hence requires commensurate prudence.
The following post-selloff market developments are worth mentioning:
These developments are mostly part of a normalization of market conditions. This process is occurring as the global economy is re-emerging from the prolonged phase of slow growth and repeated crises following the Great Recession of 2008/2009 - and is thus generally welcome.
Note: The next edition of the LGT Beacon is scheduled for mid April 2018.