Positioning for an Eventual Return to Temperance
A mid-year update on our views, focusing on the macroeconomic factors that impact short-term market moves and the valuations that influence long-run results.
Authored by: Aaron Costello
Japan: Still Awaiting Confirmation on Fundamentals
Despite the recent sell-off, Japanese equities are up considerably since last October given the promise of Abenomics; however, we remain tactically neutral given valuations and significant structural headwinds.
Australia: Steady as She Goes
For 2013, Australian equities look vulnerable in the near term, but still appear attractive relative to fixed income. While we are more cautious than the consensus, we suggest investors maintain neutral allocations to risk assets and keep the ship “steady as she goes.”
Defensive Equity Strategies – Scanning the Field
We believe a defensive approach within equity allocations makes sense today given continued unresolved macroeconomic concerns. While there are several viable strategies, approaches can vary significantly across indices and managers, making implementation a critical consideration.
Asia ex Japan – Exit the Rabbit, Enter the Dragon
Although valuations are reasonable, macro risks remain substantial. For now, investors should be neutral and seek to build overweight positions on weakness.
Australia – Hang on for the Ride
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…
Japan – The Long Road to Recovery
We continue to be neutral on Japan despite low valuations, as the catalyst for outperformance remains elusive.
Into the Unknown
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.
Emerging Markets Equities: Still Cautious
Stretched valuations and macroeconomic uncertainty leave emerging markets equities vulnerable.
U.S. Dollar: The Cyclical Versus the Secular
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.