Resilience rules

The valuations of developed government bonds look stretched in light of our economic outlook, but we still see them providing diversification – albeit less so with some yields near levels we consider to be their lower bounds. Quality equities and a focus on sustainability also can provide portfolio resilience.

Implication: We prefer U.S. Treasuries to lower-yielding peers as portfolio ballast and see a strong case for integrating sustainability into investment processes.

Why we favor U.S. equities
Relative weight in global equity quality index by country/region, 2020

• We like U.S. equities for the relatively high concentration of quality companies, as seen in the chart above. In addition, the country’s overwhelming policy support outweighs the scale seen in many other developed economies.
• Coronavirus-driven uncertainty has spurred higher implied volatility across asset classes. Central bank actions have helped tame fixed income markets, yet equity volatility remains elevated despite retreating from recent highs.
• The valuations of developed government bonds look stretched in light of our economic outlook, but we still see them providing diversification – albeit less so with some yields near levels we consider to be their lower bounds. The recent bounce in Treasury yields off record lows illustrates the risk of snapbacks.
• A focus on sustainability can help make portfolios more resilient. We see funds flowing into sustainable assets for decades, rewarding sustainable investing strategies. See Sustainability: The tectonic shift in investing. Investors rebalancing portfolios after the risk asset selloff may consider leaning into such exposures.

Bottom line: We prefer U.S. Treasuries to lower-yielding peers as portfolio ballast and see a strong case for integrating sustainability into investment processes.