Global CIO video: "We have monetary policy on our side"
While global manufacturing remains in a slump and recession worries persist, central banks' policy easing has provided an important support for financial markets, and equities in particular. In the new Global CIO video, we look at the latest developments and our current views.
While we acknowledge that the economic cycle is in an advanced stage, we maintain that the global expansion has not run out of breath. Any spillover from manufacturing into other sectors, notably services, should be contained.
This is why we continue to find equities attractive, particularly as bond yields are low while global equities' dividend and earnings yields are relatively high and valuation is undemanding. We think that investors should therefore look through this temporary weakness in manufacturing and search out opportunities in equities over the next 3-6 month horizon.
US equities preferred
In terms of tactical allocation, we prefer US equities as we believe that they offer exposure to a rather defensive market. In terms of equity sectors, we prefer financials and IT. With regard to fixed income, we are cautious on government and investment grade (IG) bonds as we believe yields are extremely low and such levels are unlikely to be sustained when manufacturing rebounds. That being said, we note the positive diversification effects from having high quality bonds in a portfolio.
Investors need to be conscious that the current economic cycle is in an advanced stage. One tried-and-true way to reduce risk within portfolios is through diversification. Investors should allocate money into equities, fixed income and alternative investments, as per their risk profile, in order to diversify risk. Another step we have taken to address risk within our portfolios as we move further into the cycle is to add "buffers" to protect against a significant drop in financial markets, and this includes our Hedging the Cycle strategy.