Tactical Asset Allocation – August 2020

We expect the global economy to remain in a recovery regime.

The global economy continues its gradual healing process. Based on our macro regime framework, we expect the global business cycle to remain in a recovery regime, with growth below trend and expected to improve over the next few months. Recent economic data show that more regions around the world have now entered a recovery regime, with Europe and Emerging Asia still leading the way. While momentum in the US has slowed down, market expectations remain tilted toward an improving growth environment over the next few months.

Figure 1: Leading economic indicators suggest the recovery is broadening, but Emerging Asia and Europe continue to exhibit stronger momentum.

Source: Invesco Investment Solutions team proprietary research, June 30, 2020.
Source: Invesco Investment Solutions. Macro regime data as of July 31, 2020. The Leading Economic Indicators (LEIs) are proprietary, forward-looking measures of the level of economic growth. The Global Risk Appetite Cycle Indicator (GRACI) is a proprietary measure of the markets’ risk sentiment.

Figure 2: Improving growth expectations, signaled by rising risk appetite, suggest the global business cycle should continue to recover over the next few months.

Sources: Bloomberg L.P., MSCI, Citi, Barclays, JPMorgan, Invesco Investment Solutions research and calculations, from January 1992 to July 2020. The Global Leading Economic Indicator (LEI) is a proprietary, forward-looking measure of the macroeconomic trend level. The Global Risk Appetite Cycle Indicator (GRACI) is a proprietary measure of the markets’ risk sentiment. A level above (below) 100 on the Global LEI signals growth above (below) a long term average trend, while a GRACI number above (below) zero suggests above trend risk sentiment.

Meaningful economic policy developments in Europe contributed to higher market sentiment, in our view. The creation of a European Recovery Fund was of utmost importance to avert risks of a prolonged recession in parts of Europe, but also may minimize the threat of a new European debt crisis, the return of Euro break-up risk, and a repeat of the costly impasse of 2010-2012. For the first time in the history of the Euro, authorities have agreed to a large-scale economic program of mutual support in a timely manner, clearly signaling to the market their willingness to find a political compromise and embrace a common path forward during an emergency.

We believe there are two main threats to this favorable cyclical outlook:

  • loss of fiscal impulse in the United States, caused by expiring benefits and other policies of social support;
  • a second wave of COVID-19 cases in the northern hemisphere during the fall, causing the largest economies in the world to re-instate lockdown measures.

We believe a second round of lockdown measures is likely to have a less severe impact than the first, given a lower level of uncertainty in the marketplace and a higher level of preparedness in the economy compared to the initial shock. However, such a shock would be enough to tilt the economy back into contraction, and it still represents a non-negligible probability. We expect our framework to adjust in a timely manner if the probability of this scenario increases meaningfully.

Investment Positioning

We maintain a higher risk posture than the benchmark in our Global Tactical Asset Allocation model, sourced through an overweight exposure to equities and credit at the expense of what have been negative or low yielding government bonds outside the US.1 In particular:  

  • Within equities we hold large tilts in favor of developed markets outside the US and emerging markets, driven by more favorable cyclical conditions, attractive local asset valuations, and an expensive US dollar which, in our opinion, is in the early stages of a long-term depreciation cycle. The confluence of these medium and short-term drivers increases the potential for long-term capital inflows in non-US equity markets. As a result, we hold a large underweight position to US equities, especially in quality and momentum stocks, given our tilts in favor of value and (small) size factors. The underperformance of small and mid-cap value stocks versus large cap quality and momentum stocks continued to be one of the most prominent and surprising features of this market recovery.1 While rational economic explanations for such a divergence can be found in the technology-driven nature of the Covid-19 recovery, as well as the Quantitative Easing-driven interest rate environment, even a modest recovery in the global earnings cycle for small and mid-cap value companies can lead to a positive impact on prices, given high operating leverage and attractive valuations. 
  • In fixed income, we maintain an overweight exposure to US high yield credit, emerging markets sovereign dollar debt, and event-linked bonds at the expense of investment grade corporate credit and government bonds, particularly in developed markets outside the US, given what has been the negative yield environment.1  Overall, we are overweight credit risk and neutral duration versus the benchmark.
  • In currency markets, we maintain an overweight exposure to foreign currencies, positioning for long-term US dollar depreciation. Within developed markets we favor the Euro, the British pound, the Canadian dollar and the Norwegian kroner. In emerging markets, we favor the Indian rupee, Indonesian rupiah and Russian ruble.

1 Source: Bloomberg, L.P., as of 7/31/20

Important Information

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Credit risk defined as DTS (duration times spread).

Before investing, investors should carefully read the prospectus and/or summary prospectus and carefully consider the investment objectives, risks, charges and expenses. For this and more complete information about the fund(s), investors should ask their advisors for a prospectus/summary prospectus or visit invesco.com.

The opinions expressed are those of Alessio de Longis as of August 7, 2020, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions, there can be no assurance that actual results will not differ materially from expectations.

Diversification does not guarantee a profit or eliminate the risk of loss.

In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic and political conditions.

The risks of investing in securities of foreign issuers, including emerging market issuers, can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.

The dollar value of foreign investments will be affected by changes in the exchange rates between the dollar and the currencies in which those investments are traded.

An investment in exchange-traded funds (ETFs) may trade at a discount to net asset value, fail to develop an active trading market, halt trading on the listing exchange, fail to track the referenced index, or hold troubled securities. ETFs may involve duplication of management fees and certain other expenses. Certain of the ETFs the fund invests in are leveraged, which can magnify any losses on those investments.

Stocks of small and mid-sized companies tend to be more vulnerable to adverse developments, may be more volatile, and may be illiquid or restricted as to resale.

Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.

Junk bonds involve a greater risk of default or price changes due to changes in the issuer’s credit quality. The values of junk bonds fluctuate more than those of high-quality bonds and can decline significantly over short time periods.

Because the Subsidiary is not registered under the Investment Company Act of 1940, as amended (1940 Act), the Fund, as the sole investor in the Subsidiary, will not have the protections offered to investors in U.S. registered investment companies.

The performance of an investment concentrated in issuers of a certain region or country is expected to be closely tied to conditions within that region and to be more volatile than more geographically diversified investments.

The Fund is subject to certain other risks. Please see the current prospectus for more information regarding the risks associated with an investment in the Fund.

Alessio de Longis is a Senior Portfolio Manager for the Invesco Investment Solutions team at Invesco. In this role, he leads the group’s global tactical asset allocation effort, focusing on the development, implementation and management of macro regime-based investment strategies across asset classes, risk premia and factors. Additionally, he develops and manages active currency overlay strategies and solutions for multi-asset portfolios.

Mr. de Longis joined Invesco in 2019 when the firm combined with OppenheimerFunds, where he was team leader and senior portfolio manager of the Global Multi-Asset team. Prior to joining the Multi-Asset team, he was member of the Global Debt team from 2004 to 2013, serving as currency portfolio manager and global macro strategist. He is a published author in the field of systematic currency investing using macro-based strategies, and he is regularly featured across financial media outlets.

Mr. de Longis earned an MSc in financial economics and econometrics from University of Essex, as well as MA and BA degrees in economics from the University of Rome Tor Vergata. He is a Chartered Financial Analyst® (CFA) charterholder.

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