A quick useful post that summarises our DAA tilts.
Moderately defensively positioned given:
- Tighter monetary policy
- Tighter fiscal policy
- Expensive equity valuations
- Overly narrow credit spreads
The Fed is actively hawkish now, and wants inflation to slow, and slow via reduced aggregate demand. Powell needs tighter financial conditions, that will help act as a handbrake on the economy.
That means he’s looking for:
- A higher USD (acts as a break on inflation, as a higher USD crimps exports, a component of aggregate demand)
- Lower asset prices (as higher asset prices spur wealth and income effects across investment and consumption and risk taking more generally)
A higher USD tends to be a negative for commodity prices, as commodity prices are denominated in dollars. It also tends to slow emerging market demand, as capital outflows and scarcity of dollars make domestic financing more expensive.
And that leads us to our positioning
- UW credit, still UW fixed income in general, with a modest narrowing of government bonds as longer dated yields rise
- UW commodities, with the exception of oil and gas, where the fundamentals are more attractive
- UW emerging markets, relative to our SAA
So far, these tighter financial conditions are showing up in the tug of war between growth stocks, that are sensitive to changes in the discount rate, and value stocks, which are not. Tug of war is precisely the right word set, as the amount of volatility creeping into the daily performance of either basket is sizeable.
January was very much a month about weaker growth stocks. The last day or two of January, and this first trading day of February, seems to be about stronger growth stocks. The oscillation in bond yields, specifically 10 year yields, is driving this choppy trading pattern.
We will continue to stick with our cyclical tilt towards value in our multi-asset portfolios, and in our direct equity carve-outs. The ex-ante return profile of growth stocks is weak, to our mind, with pockets of material exuberance and, we think, associated overvaluation.
But it will a bumpy ride, we think.
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