Tactical asset allocation — November 2020

The recovery continues, despite the challenge of a second wave

Macro update

The return of the coronavirus across Europe and the Americas represents an important risk factor for the global economic recovery. We contemplated this risk back in the spring and outlined a baseline scenario of a meaningful second wave of COVID-19 infections across the northern hemisphere upon the return of colder temperatures. The probability of a double-dip recession in Q4 2020 is certainly increasing across multiple regions, but it does not need to translate into the same economic and financial shock experienced with the first wave. A combination of ample monetary and fiscal policy support, together with economic adjustments and measures implemented over the past seven months, is likely to reduce the uncertainty associated with this second wave compared to the first. While it is certainly too early to draw definitive conclusions, as the situation remains very fluid, our forward-looking measures of economic activity and market sentiment continue to suggest the global economy should remain in a recovery regime in the near term (Figure 1).

Figure 1: Leading economic indicators and market sentiment suggest the global economic recovery continues, with emerging markets moving to an expansion regime

Chart, scatter chart, bubble chart

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Sources: Bloomberg, L.P., Macrobond as of Oct. 31, 2020. Invesco Investment Solutions research and calculations. Proprietary leading economic indicators of Invesco Investment Solutions.

The speed of the recovery is flattening across regions as the V-shaped rebound begins to normalize and most economies begin to approach trend-growth rates. Notably, the relative growth momentum between the United States and other developed markets has tilted in favor of the former, as a result of catch-up effects and the anticipation of new, selective lockdown measures implemented in the eurozone and the UK. Emerging markets, particularly Asia, continue to lead the cycle and, according to our framework, have now entered an expansion regime with growth above-trend and improving. Despite recent underperformance in equity markets and increased volatility, our measure of global market sentiment suggests some resilience and confidence in the marketplace on the global recovery for now. Current events ranging from the US election to the evolution of the pandemic will drive the path of investor confidence and growth expectations over the next couple of months. We will closely monitor the evolution of our framework and reposition our investment strategies accordingly.

Investment positioning

We have implemented one change this month, closing our overweight exposure to developed market equities outside the US. While local market and currency valuations remain supportive, their relative growth momentum is weakening, leading us to a neutral stance between the two regions (Figure 2).

Figure 2: Relative tactical asset allocation positioning

Source: Invesco Investment Solutions, Oct. 31, 2020. For illustrative purposes only. Allocations for Invesco Global Allocation Fund. Light blue represents equity risk categories, while dark blue represents fixed income. Risk measured by tracking error.

We maintain a higher risk posture than our benchmark1 in the Invesco Global Allocation Fund, sourced through an overweight exposure to equities and credit at the expense of government bonds. In particular:

Within equities, we hold large tilts in favor of emerging markets compared to developed markets, driven by favorable cyclical conditions, improving risk appetite, attractive local asset valuations, and an expensive US dollar.

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. Overall, we are overweight credit risk and neutral duration2 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 Canadian dollar and the Norwegian kroner. In emerging markets, we favor the Indian rupee, Indonesian rupiah, and Russian ruble.

1 Global 60/40 benchmark (60% MSCI All Country world Index /  40% Bloomberg Barclays Global Agg USD Hedged)

2 Credit risk defined as DTS (duration times spread).

Important information

Blog header image: Rodrigo Kugnharski / Unsplash

The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets.

The Barclays Global Aggregate Index is an unmanaged index considered representative of the global investment grade, fixed income markets.

Credit risk defined as DTS (duration times spread).

Tracking error measures the divergence between price behavior of a portfolio and the price behavior of a benchmark.

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.

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.

Issuers of sovereign debt or the governmental authorities that control repayment may be unable or unwilling to repay principal or interest when due, and the Fund may have limited recourse in the event of default. Without debt holder approval, some governmental debtors may be able to reschedule or restructure their debt payments or declare moratoria on payments.

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.

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 financial professionals for a prospectus/summary prospectus or visit invesco.com.

The opinions expressed are those of the author as of Nov. 13, 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.

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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