Tactical Asset Allocation – June 2020

We examine the potential path forward as major economies reopen and markets rally.

Our macro regime framework is signaling that the global economy is moving into a recovery regime. While economic data have deteriorated further over the past month, particularly in the developed world, sentiment in global capital markets continues to improve, as broad-based outperformance in risky assets indicates improving global growth expectations. Extraordinary monetary and fiscal policy announcements have helped markets find a bottom in late March, and the steady decline in new Covid-19 infections in the developed world has increased the likelihood of a gradual reopening across major economies in Europe and North America over the next month.

As a result, markets have quickly repriced improving growth expectations, which lead our macro framework to move to a recovery regime after spending four months in contraction. Based on our leading indicators we are already seeing this recovery materialize in major economies across Asia, which led the way during the downturn and now leads the way in a recovery (Figure 1). Chinese business surveys and industrial production data are early evidence of improving economic momentum.1

Figure 1: Market sentiment signaling improving growth expectations and a recovery regime. Asian leading indicators already improving

Source: Invesco Investment Solutions. Macro regime data as of May 31, 2020. The Leading Economic Indicators (LEIs) are proprietary, forward-looking measures of the macroeconomic trend level. The Global Risk Appetite Cycle Indicator (GRACI) is a proprietary measure of the markets’ risk sentiment. For illustrative purposes only

As we discussed in our latest update, the duration and strength of the recovery will likely depend on whether reopening the economy will affect the spread of the disease and how countries will contain the potential increase in new contagions. We believe these developments are in line with the base case scenario we outlined last month, centered on the hypothesis that the world economy would start the reopening process at the beginning of the summer, but that such process would be gradual, uneven across industries and countries, and subject to much uncertainty given the lack of meaningful developments of medical treatments.

Investment positioning

We have implemented several changes in our portfolio over the past couple of weeks given the transition from a contraction to a recovery regime, increasing the total risk posture of our portfolio from below average to above average and adjusting exposures across asset classes, regions and style/factors. In particular:

  • We have moved our total equity exposure from underweight to neutral and increased the cyclicality of its composition, moving from underweight to overweight emerging market equities vs. developed markets. In addition, we have moved from defensive towards cyclical factors, tilting in favor of (small) size and value in US equities.
  • In fixed income, we have increased our credit risk by moving from US investment grade to US high yield credit, while maintaining previous exposure to emerging markets sovereign dollar debt. We maintain a moderate overweight to duration risk with a bias towards yield curve steepeners and maintain our exposure to alternatives such as event-linked bonds.
  • In currency markets, we have increased our total foreign currency exposure, positioning for US dollar depreciation. Furthermore, given the currency moves over the past few months, a rebalancing towards undervalued currencies has led to a reduction in safe havens such as the Japanese yen and the Swiss franc in favor of more growth sensitive exposures like the Euro, Canadian dollar and Scandinavian currencies.

Footnotes

1. Source: Macrobond 2020

2. Source: Average risk posture refers to the Global 60/40 benchmark volatility (60% MSCI ACWI / 40% Bloomberg Barclays Global Agg USD Hedged).

Important Information

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 June 5, 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.

Derivatives may be more volatile and less liquid than traditional investments and are subject to market, interest rate, credit, leverage, counterparty and management risks. An investment in a derivative could lose more than the cash amount invested.

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.

Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products and collective trust funds, and is an indirect, wholly owned subsidiary of Invesco Ltd.

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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