We are neutral on Australian equities and bonds, but still a bit nervous about the Australian dollar. While Australia faces some homegrown challenges, most of the risks emanate from offshore. We see a balance of potential upside—and downside—risks that argue investors should hope for the best, but prepare for the worst and ultimately hang on…
We continue to be neutral on Japan despite low valuations, as the catalyst for outperformance remains elusive.
The current investment environment is one in which the range of possible outcomes, both positive and negative, remains wide. Investors need to be prepared for another volatile macro-driven year, as markets grapple with divergent pressures on growth and inflation stemming from the unknown effects of unconventional monetary policy.
Stretched valuations and macroeconomic uncertainty leave emerging markets equities vulnerable.
Cyclical factors appear to be dollar supportive against other major developed markets currencies, while secular fundamentals argue for continued U.S. dollar weakness against emerging markets currencies.
While Asian economies seem poised for faster economic growth than the developed world, these superior prospects are already incorporated into equity valuations, leaving Asian equities vulnerable to near-term disappointment.
Japanese equities are again oversold, unloved, and undervalued to the point where in the past the market has managed to post subsequent relative outperformance. However, it may be some months before Japanese equities decisively outperform, given the headwinds of a strong yen and uncertainty surrounding economic policy and the strength of the global economic recovery.
This is the eighth in what has evolved into a series of occasional papers, Asset Allocation in the Current Environment, on the evolution of the secular bear market in equities and our thoughts on how investors can best cope with the prevailing uncertainties.
The collapse in S&P earnings over the past year and the range of future possible earnings estimates create high uncertainty around U.S. equity valuations.
With U.S. Treasury yields at their lowest levels in over 50 years, the effectiveness of Treasuries as a “deflation hedge” has been greatly diminished. While the current environment still demands that investors maintain deflation protection, investors should take advantage of the recent rally in Treasuries to rebalance allocations back to target and actively seek to…