Asset Allocation: Advantage Equities
Author: Kevin McCreadie
January 31, 2020
Kevin McCreadie, AGF’s CEO and Chief Investment Officer, discusses the AGF Asset Allocation Committee’s recent quarterly rebalancing and ways that an investor may position a portfolio in the current market environment.
How has the market landscape changed since the fourth quarter of 2019?
Probably the biggest change we’ve seen is the removal of some of the uncertainty that plagued us through much of the last part of the year. The uncertainty around Brexit—the hard exit scenario—as well as the bigger issue of a full-blown trade war between the U.S. and China are now behind us, but we still don’t know for sure what damage was done. Did it really damage consumer confidence? Probably not. Did it damage CEO and CFO confidence? To a degree, yes. And so that could impact CAPEX spending plans going forward. And you must compound that with other events including the General Motors strike in the fourth quarter as well as the production cuts that Boeing is being forced to make related to the grounding of its 737 Max aircraft last year.
Plus, over the past month, there’s almost been a war and now the threat of a global pandemic.
The markets are always going to deal with these one-offs. The market priced out the U.S.-Iran conflict quickly once it was clear there wasn’t going to be a greater event. Now, we’re dealing with the coronavirus, which may impact global growth, but it’s yet to be seen how much of an impact this could have on the broader economy and markets.
What is our asset allocation committee’s current position on equities (in the context of a 60/40 portfolio)?
We started to warm up to equities in the fourth quarter of last year and moved at the start of January from a slight underweight to a slight overweight in our asset allocation to stocks. But we still have a hedge within our equity bucket [via an anti-beta market neutral strategy] to offset potential volatility that may occur, for instance, in the case that economic data starts to come in a little weaker than expected.
Where do you see the best opportunities within the equity universe?
We’re underweight developed market equities right now, and are overweight emerging markets. It is four or five multiple points cheaper than the U.S. with probably better growth than you’re going to find anywhere in the world. We still favour Japan as well, and we’re starting to move a little bit underweight to the U.S. If the world starts to cyclically recharge, you’re going to see more plays that will look more interesting outside of the U.S., potentially even Europe, and maybe Canada too.
And what about bonds?
Yes, we’re underweight fixed income on the fact that we think rates are going to be volatile. When we look across the spectrum, we like emerging markets—just as we do for equities—as well as high-yield credit. We think at this point in the cycle you can still get paid a little bit extra on the coupon, because we haven’t seen any real signs of credit deterioration at this juncture.
Kevin McCreadie is Chief Executive Officer and Chief Investment Officer at AGF Management Ltd. He is a regular contributor to AGF Perspectives.
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