Tactical Asset Allocation Views – November Update

A meaningful improvement in emerging markets warrants increasing portfolio risk

In our most recent blog, we described a global macro backdrop characterized by two major forces; slowing global growth and an improving risk appetite driven by global monetary policy easing. We entered the fourth quarter of 2019 with a moderately defensive asset allocation position while waiting for evidence of a more significant upturn in market sentiment, and a cyclical rebound in leading economic indicators to start increasing risk in the Invesco Oppenheimer Global Allocation Fund. Recent economic data releases suggest this moment may have arrived sooner than we expected.

A new dynamic has formed in emerging markets

Our macro framework has registered an improvement in several leading economic indicators across large emerging economies such as China, India, Korea, Taiwan, and Brazil, among others. In the developed markets, while the US has continued to decelerate, we have been seeing green shoots in parts of Europe, namely Germany, for the first time in two years, which may bode well for the rest of the region soon. As illustrated in Figure 1, the latest round of economic data pushed our proprietary China and aggregate Emerging Markets (EM) leading economic indicators (LEIs) well into a recovery phase, with Europe and Japan seemingly getting closer to this cyclical turning point as well. In addition, risk appetite has continued to improve, increasing the likelihood of a broader cyclical rebound over the next few months.


Figure 1: Improvement in economic data across large emerging market economies during October 2019

Source: Invesco Investment Solutions team proprietary research, November 2019. For illustrative purposes only

As a result of these developments, we see a reason to add risk to the Invesco Oppenheimer Global Allocation Fund. We have moved our global equity exposure from underweight to neutral and meaningfully increased our overweight in emerging market equities and currencies, with a tilt towards carry and value factors (i.e., high yielding and cheap currencies). While we remain marginally underweight US equities, we continue to hold a pro-cyclical factor tilt towards value and small size. Finally, we maintain a duration overweight with a steepening bias in the US yield curve.

Some factors have stayed the same

From our previous outlook, we remain overweight alternative income assets because of their higher long-term expected returns and diversification properties in the late stages of the credit cycle. As a reminder, we believe opportunities and risks change over the course of the market cycle, and asset allocation should too. By incorporating the perspectives of the Invesco Investment Solutions team through proprietary macro, risk, and market research, we seek to capture these opportunities in the short to medium term. These views are expressed by dynamically allocating across asset classes, geographies, currencies, and factors.

Figure 2: Global allocation portfolio positioning as of November 6, 2019

Source: Invesco Ltd., 11/6/19. Portfolio allocations are displayed in terms of notional value and may exceed 100% as a result of exposure to derivatives. Notional Allocation refers to exposure gained through the use of derivative instruments when there is not an offsetting cash position. Holdings are subject to change.

Footnotes

1. 60% MSCI ACWI Index & 40% The Bloomberg Barclays Global Aggregate Bond Index (USD Hedged)

Important Information

Blog Header Image: Taelynn Christopher / Unsplash

Alternative investments can be less liquid and more volatile than traditional investments, such as stocks and bonds, and often lack longer-term track records.

Green shoots describe signs of economic recovery or positive data during a period economic slowdown.

The carry factor describes using high-yielding assets to provide higher returns than lower-yielding assets

The value factor describes when an asset that is inexpensive relative to some measure of fundamental value outperforms those that are pricier

Yield curve is a curve showing several yields or interest rates across different contract lengths, in our case US treasury 3 month to 10 year.

Credit cycle describes the phases (early, mid, late) of access to credit by borrowers

Duration measures interest rate sensitivity. The longer the duration, the greater the expected volatility as rates change.

The MSCI ACWI Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets. The index is computed using the net return, which withholds applicable taxes for non-resident investors.

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

The opinions expressed are those of Alessio de Longis as of November 12, 2019, are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals.

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

MSCI Inc. Neither MSCI nor any other party involved in or related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.

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 US 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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