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Global Beta Series: 1Q2023 Positioning

Allocation Rationale: 01/24/2023

Summary

The overall theme for 2022 was about decreasing the risk of our strategies towards equity weight neutrality. During our last realignment in October, we tactically increased allocation to fixed income assets to capture the spike in longer dated rates, while avoiding the inevitable credit spread expansion, by focusing on sovereign U.S rates (UST). Given the degree of geopolitical, economic and market uncertainty at the time, we believe it was worth sacrifice a bit of the upside by keeping the weight of risky assets closer to neutral, in order to protect the downside if geopolitical tension had increased and inflationary pressures kept eluding central bankers.


Given that the expected global path of inflation has improved, we believe that central bankers could start shifting towards monetary accommodation, while economic growth remains positive in most, if not all, major economies. With better visibility of monetary policy and the economic path, we began to SLOWLY shift back towards constructive risk taking.

Within our fixed income allocation, we have eliminated inflation-oriented hedges and moved towards slightly longer durations given that we believe that longer-dated interest rates have, for now, peaked. We are also shifting back towards credit risk (IG and HY) to take advantage of relatively healthy corporate balance sheets and wider spreads.


Within equities, the risk of slower economic growth or even an economic contraction is still very much alive, but our research is not suggesting that a recession is guaranteed. If a recession doesn't happen or if it's only technical and shallow, we think there is potential upside for equities with a limited downside risk given the performance of equity markets in 2022.


We are closely watching Q1 2023 corporate results and economic data to make sure that our bull/bear case continues to suggest limited downside vs. potential upside for longer duration assets. More specifically, we still see overall inflation decelerating in the next few quarters, but we must see central banks taking the foot of the break before further committing to riskier assets.


Benchmark FI40.EQ60 portfolio allocation


Outlook

Global Fixed Income

DM Rates

Assuming peak inflation and peak longer dated rates are behind us, we started to slowly extend duration.

DM Credit (IG and HY)

With peak rates, we are now back at focusing on capturing higher grade spread premium.

EM Credit (Hard/Local $)

With peak USD also behind us and expectations for a less hawkish Fed, EM credit looks attractive on a tactical basis.

Global Equities

DM Americas

US overweight remains the foundation of our equity allocation. However, on a relative tactical basis we favored Int'l developed during this realignment given some earnings concerns from a weaker USD and the possibility that a few more Fed rate hikes could trigger an increase in volatility for the first quarter, possibly, the first half of the year.

DM International (x-US)

Int'l developed equities have shown signs of decoupling from U.S. equities. While the consensus is still somewhat negative, we see a weaker USD providing a small boost to earnings results. We still underweighting the region, but less so.

EM All Regions

We see EM equities benefiting from an expectation for a weaker USD, accommodative EM interest rates and a short-term economic boost from a shift in covid policies in China.

Alternatives

Natural Resources

Precious Metals

Private Equity

Despite marginal improvements for global economic growth expectations, we don't see yet a strong case to increase commodity exposure. We kept the allocation to the US infrastructure industry.

 

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