Global Asset Allocation Viewpoints

Market Perspective

As of 31 May 2021

• Global economic growth to remain above trend this year but nearing peak levels as major economies make progress on vaccinations and reopen over the summer.
• Global monetary policy outlook broadly supportive with most major central banks expected to remain on hold well into next year, although beginning to see a gradual trend toward tightening by some central banks, notably within emerging markets (EM), facing rising inflation.
• Asian and European economies that have trailed in pace of vaccinations should see improved growth trajectory over coming quarters as they advance reopening and benefit from their more cyclically oriented economies.
• Key risks to global markets include the path forward for the coronavirus, rising inflation, higher taxes, central bank missteps, and increasing geopolitical concerns.

Portfolio Positioning

As of 31 May 2021

• No changes in positioning over the period.
• We remain modestly underweight equities relative to bonds and cash as the risk/reward profile looks less compelling for equities and could be vulnerable to potential setbacks in the recovery, fading policy support, rising inflation, and higher taxes.
• Within equities, we favor value-oriented equities globally, U.S. small-caps, and EM stocks as we expect cyclically exposed companies to continue to benefit from the improvement in growth throughout the year.
• Within fixed income we continue to have a bias toward lowering duration risk and overweighting credit and inflation sensitive sectors such as high yield bonds, floating rate loans, and short-term TIPS.

Market Themes

As of 31 May 2021

Just Passing Through?

The Federal Reserve has been consistent in its messaging that a near-term spike in inflation pressures will be transitory and recede once COVID-related impacts fade. The latest inflation print showed prices, as measured by core personal consumption expenditures (PCE), jumped 3.1% year-over-year, the highest level in three decades due to supply chain and labor shortages, unleashed pent up demand, and base effects. While the data showed consumers are facing steep price increases across a range of areas including used cars, hotel prices, and air fare, these are expected to fade as pent-up demand subsides. So far, the bond market seems to believe the Fed’s transitory view; however, the risk may be that the transition takes a bit longer than markets anticipate. Labor shortages and unconstrained fiscal spending in the U.S. could keep inflation elevated for longer, forcing the Fed and bond market to react faster than anticipated.

Easy Come, Easy Go

Global central banks were quick to act last year in response to the coronavirus pandemic, unleashing ultra-easy monetary policies, helping countries weather the economic impacts and aiding in the current growth rebound. Now on the back of more stable growth, some central banks have more recently announced plans to start pulling back on policy, including Canada and South Korea. Meanwhile, some EM central banks have already started raising rates this year, such as Russia, Turkey, and Brazil; however, the motivation has been more to fend off rising inflation compounded by COVID-related shortages. While the trend in global easing appears to be behind us, the major central banks are still pledging to maintain current support well beyond next year. Despite their intentions, markets have pulled forward expectations of when they’ll act on recent data showing higher inflation. The months ahead could see more volatility as investors reevaluate how fast “easy” may go.

Regional Backdrop

As of 31 May 2021

United States

Positives

• Vaccinations widely distributed, case count near lows
• Monetary policy remains very accommodative
• More fiscal support on the way
• Healthy consumer balance sheets and high savings rate

Negatives

• Elevated stock and bond valuations
• High corporate and government debt levels
• Corporate taxes likely to rise
• Unemployment remains elevated

Europe

Positives

• Higher exposure to more cyclically oriented sectors that should benefit from economic recovery
• Pace of vaccinations has significantly improved
• Monetary and fiscal policy remain accommodative
• Equity valuations remain attractive relative to the U.S.
• Stronger long-term euro outlook

Negatives

• Spread of new variants leading to continued outbreaks
• Limited long-term catalysts for growth
• Limited scope for European Central Bank to stimulate further
• Brexit likely to negatively impact trade

Developed Asia/Pacific

Positives

• Cyclical orientation should benefit from economic rebound
• Strong fiscal and monetary support
• Improving corporate governance

Negatives

• Vaccination effort has been slower than other developed markets
• Weak economic growth going into crisis, driven by long-term demographic headwind
• Limited long-term catalysts for growth

Emerging Markets

Positives

• Exposure to cyclical areas of economy should benefit from broad global recovery
• Commodity prices rising
• Chinese economy remains strong
• Equity valuations attractive relative to developed markets

Negatives

• COVID-19 risk remains high in Central Asia and Latin America
• Vaccine supply and distribution infrastructure are well behind developed markets
• Stimulus from China is fading
• Limited ability to enact fiscal stimulus (excluding China)

Asset Allocation Committee Positioning

As of 31 May 2021

Portfolio Implementation

As of 31 May 2021