Global Asset Allocation: March Insights

Market Perspective

• Global economic growth is expected to moderate over the course of the year but remains above trend. Expectations for a moderation in inflation over the year may be stalled by inflationary pressures resulting from the conflict in Ukraine.
• Despite rising geopolitical risk impacting growth, developed market central banks are advancing toward tighter policies, the US Federal Reserve is expected to raise rates in March, the European Central Bank is curbing asset purchases and the Bank of Japan remains on hold. Emerging market central banks may need to raise interest rates to defend currencies against a stronger US dollar and to contain inflation.
• Short-term rates are biased higher with central banks tightening, while long-term rates balance concerns of slowing growth, the trajectory of inflation and risk-off sentiment.
• Key risks to global markets include the conflict in Ukraine, accelerating inflation off already high levels, central bank missteps, emergence of COVID‑19 variants and China’s growth trajectory.

Portfolio Positioning

As of 28 February 2022

• While valuations are off recent peaks, we remain underweight equities given moderating growth and earnings outlook amidst an active Fed and inflation concerns. Within fixed income, we remain overweight cash as longer rates remain biased higher.
• Within equities, we trimmed our overweight to US value stocks and into growth equities to take profits following a period of strong outperformance by value stocks and reduced the overweight to Japanese equity to further de-risk our positioning.
• Within our fixed income allocation, we continue to favour inflation-linked securities and shorter‑duration and higher‑yielding sectors through overweights to emerging market debt and high yield bonds, supported by our still‑constructive outlook on fundamentals, while keeping a cautious eye on liquidity amidst higher volatility.

Market Themes

Chaos and Consequences

Russia’s invasion of Ukraine has shocked the world, and while the immediate concerns are the human toll on the Ukrainian people, the implications and aftermath will be felt far beyond the region. With the European continent being thrown into chaos not seen since World War II, it’s no surprise to see markets unsettled as they try to comprehend the impacts. In response to the aggression, the West has successfully collaborated by implementing several punishing sanctions targeting Russian banks, the Russian central bank and Russian sovereign debt, which have sent the ruble on a downward spiral and could devastate Russia’s economy. However, so far, the sanctions have stopped short of penalising Russian energy companies, given Europe’s, and especially Germany’s, heavy reliance on Russian energy supply and the potential negative inflationary impacts of an energy price shock on already high prices related to the pandemic. As this situation continues to unfold, the consequences could be far‑reaching, weighing on global growth and further accelerating inflation—especially given the area of conflict’s notable contributions in energy and food to the rest of the world.

In and Out of Style

Equity markets’ rough start to the year facing high inflation and a more aggressive Fed has only gotten worse amidst rising geopolitical issues in Ukraine, with the S&P 500 Index down roughly 8% year-to-date. Notable as the sell-off has deepened is that growth stocks have continued to underperform, where they are typically seen as more defensive in risk-off environments. Year-to-date, Russell 1000 Value Index stocks are down as well, but just 3%, while the Russell 1000 Growth Index has fallen over 14%, largely due to fears that already high inflation could worsen and lead the Fed on a more aggressive tightening trajectory. Although more cyclically oriented, value stocks have held up relatively well; nearly all of the positive contribution came from energy, which makes up 15% of the Russell 1000 Value Index and is up over 30% year‑to‑date. With the conflict continuing to unfold in Ukraine, as investors and central banks evaluate the balance of rising inflation pressures and slowing growth with the possibility of stagflation, growth and value stocks may be out of style.

 

For a region-by-region overview, see the full report (PDF).