Tactical Asset Allocation – September 2020

A strengthening global recovery to support risky assets, favoring developed ex – US and emerging market equities.

Macro update

We believe the global economy is healing, and we expect its upward growth trajectory to continue for the reminder of the year. Based on our macro regime framework, the global business cycle remains solidly in a recovery regime, with growth below trend and expected to improve over the next few months. The recovery is strengthening in its depth and breadth. Our leading economic indicators suggest growth is gaining momentum. Trade activity within Emerging Asia is rebounding strongly, providing further evidence the global manufacturing cycle is normalizing— supported by rebounding orders and demand in the developed world.

Global market sentiment continues to improve, as evidenced by broad-based outperformance of risky assets over defensive assets in both equity and fixed income markets. Improving risk appetite tends to correlate strongly with improving growth expectations, suggesting market participants expect the recovery to continue for the reminder of the year.

Figure 1: Leading economic indicators suggest the recovery is strengthening and is now shared across regions around the world.

Figure 2: The recovery should continue into year-end, as growth expectations and market sentiment continue to improve.

The impressive rebound in global equity markets has been extraordinary, despite record contraction in GDP and rising Covid-19 contagion rates during the summer months. We attribute this steady improvement in risk appetite to a few key developments and risk factors:

  • Vaccine research: While the discovery, production and distribution of a vaccine is still months away and subject to uncertainty, market participants have responded positively to preliminary results from multiple vaccine studies around the world (Oxford, Moderna, etc.). In other words, markets are discounting a high probability that COVID-19 is actually a good candidate for a vaccine, despite the uncertainty on the timeline, and that some form of meaningful positive development is to be expected.
  • Declining mortality rates: COVID-19 contagions have increased around the world, a well-understood price to be paid for the reopening of economies. However, mortality rates have declined meaningfully compared to the first half of 2020, suggesting that a combination of more prudent social behavior (distancing, masks, etc.), and a better prepared healthcare system will likely reduce the need for a new round of lockdowns, therefore reducing the risk of another severe contraction in global GDP.
  • Monetary policy support: Lower policy rates, sizable asset purchases from major central banks and expectations of low long-term bond yields in the future (i.e. forward guidance) contributed to a steep decline in discount rates for future cash flows, boosting prices, valuation and market sentiment.
  • Fiscal policy support: After the initial rounds of fiscal support in the first quarter, market sentiment has been boosted by additional policy initiatives around the world. In particular, the creation of a European Recovery Fund was of utmost importance to potentially reducing the threat of a new European debt crisis and the re-emerge of Euro break-up risk. On the other hand, the market is currently digesting the loss of fiscal impulse in the United States, caused by the expiration of the first round of benefits and the impasse in Congress on a new round of fiscal support, which we expect to eventually materialize at around $1.5-2.0 trillion.

Investment positioning

We believe this remains a very constructive environment for risk assets. We maintain a higher risk posture than the benchmark1 in our Global Tactical Asset Allocation model, 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 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 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. Rational economic explanations for such a divergence can be found in the technology-driven nature of the COVID-19 recovery, as well as the declining interest rate environment, both favoring quality and momentum stocks over value and small/mid-cap companies. However, even a modest recovery in the global earnings cycle for small and mid-cap value companies can lead to positive impact on prices, given high operating leverage and attractive valuations. Hence, we maintain our factor exposure tilted towards value and size.
  • 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 a negative yield environment. Overall, we are overweight credit risk and neutral duration versus the benchmark.1
  • In currency markets, we maintain an overweight exposure to foreign currencies, positioning for long-term US dollar depreciation. Focusing on a combination of attractive valuations, cyclical conditions and yield, 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. The Global Asset Allocation Model benchmark is defined as a standard Global 60/40 benchmark (60% MSCI ACWI / 40% Bloomberg Barclays Global Aggregate USD Hedged). An investment cannot be made into an index

All data is sourced from Bloomberg as of 8/31/20 unless otherwise stated.

Important Information

Blog Header Image: Jelena Jojic Tomic / Stocksy

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

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

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 September 9, 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.

Risk assets are generally described as any financial security or instrument, such as equities, commodities, high-yield bonds, and other financial products that carry risk and are likely to fluctuate in price.

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.

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.

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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