Progressing
portfolio
construction
together

Capital at Risk. The value of investments and the income from them can fall as well as rise and are not guaranteed. Investors may not get back the amount originally invested.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or financial product or to adopt any investment strategy. The opinions expressed are as of [DATE] and may change as subsequent conditions vary.

The world has changed, and so should the role of Fixed Income in your portfolio

The change in the market that we have experienced cannot be ascribed to the natural evolution of the business cycle, and therefore cannot be dealt with by tactical actions that we usually implement to capture the opportunity that such evolution presents.

In our view, this is a strategic portfolio construction problem, that will have profound impacts on all asset classes but especially Fixed Income.

	A more pervasive low rate environment brings into question the role of Fixed Income for income generation, as well as the ability to provide further downside protection in the event of a repeat equity market sell-off.
	A new macro environment reshaping growth and inflation expectations creates a larger role for inflation-linkers.
	Diminishing diversification benefits than before requires investors to look beyond traditional fixed income exposures. We see Chinese assets offering greater diversification potential despite the geopolitical tensions.
	Heightened uncertainty requires greater selectivity, as not all bonds can provide safety. ESG Fixed income exposures have a tilt towards more quality assets and can act as a way to target greater portfolio resilience.

See below for practical resources for repositioning Fixed Income in portfolios in the post-Covid19 world.

Risk: There can be no guarantee that the investment strategy can be successful and the value of investments may go down as well as up.

European Equities Barometer

History often helps us learn about the present. However, this crisis differs from any we’ve experienced before – not only in how it gripped the market, but in its likely lasting effects on the role of government, financial systems and health care spending. In Europe, we see a strong and coordinated fiscal policy delivering both near- and longer-term benefits to the region, which in turn suggests a greater role for European equities in portfolios. Three immediate observations stand out:

• The near-final agreement on a new EU recovery fund paves the way for greater European Unity and potentially more effective policy.
• Sharing debt via the new EU recovery fund will support what appears to be an already fast rebound.
• Within the equity component of portfolios, we see positive factors supporting European banks, cyclicals and healthcare.

Investing in the future

The growing popularity of thematic strategies is prompting questions from portfolio constructors and asset allocators on how to optimise such strategies within portfolios. In response, we assessed both the effectiveness of thematics and the implications for portfolio construction. While we believe thematic strategies could help investors gain efficient exposure to megatrends such as technological breakthroughs, assessing their effectiveness is challenging as most successful themes are still in their early stages. However, a back tested analysis of two themes with low correlation suggests that including thematic strategies may indeed help portfolios outperform markets over the long run. However, targeting the right themes is key. We identify three main approaches for incorporating thematics in broader portfolios, depending on the investor’s investment objective and preferences:

	A core-satellite approach
	Replacing part of the equity allocation with thematic exposures
	Thematics as the core approach

MKTGH0820E-1275140-1/5