INVESTMENT DIRECTIONS

Great expectations

Feb 16, 2018
By Christopher Dhanraj

The best of times?

The recent burst of volatility has been unnerving, but it is important to remember that the macro environment of synchronized economic growth and muted macro risks remains solid, although some are concerned about potential inflation and higher interest rates. Indeed, that backdrop supports our recent upgrade of U.S. equities to overweight.

Equities to yield curve:
You talkin’ to me?

The shape of the yield curve can be a barometer for future growth, but its shape depends on a number of factors. Last year, it was relatively flat—often a sign of impending recession, but instead a result of higher short-term rates with expectations of Federal Reserve tightening. The curve began steepening later with expectations of stronger growth, underscoring our preference for cyclicals, namely financials and technology.

The specter of trade wars

What is the greatest risk to the markets right now? We would argue it is the potential for increased protectionism, which mostly just took the form of rhetoric in 2017. Investors may be discounting the risk that will change—and should evaluate whether their portfolios are exposed to risks from rising protectionism, particularly with respect to NAFTA and China.

Emerging markets: Commodity vs. non-commodity producers

During this recent market selloff, EMs have held up relatively well—actually outperforming U.S. equities during this leg lower. Within EM, we are monitoring an interesting development: the rise in commodity prices in recent months historically would have resulted in a rally in EM commodity producers. This time, however, non-commodity producers have outperformed their commodity producing counterparts, as domestic growth and reform efforts are prevailing.

Taking a look at mortgages

It’s a tough environment for fixed income generally, but investors still need bonds in their portfolio for income and as a diversifier. One potential solution: consider agency mortgage-backed securities, which offer relative value to other high grade securities.

Reframing the volatility and correlations trends

Volatility and correlations have been relatively low, but that creates some challenges in finding the right blend of risk assets and stable diversification.

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