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Asset Allocation Insights – Lower Growth Hits Equities

Asset Allocation Insights - January 13 2019


Taking a Breather Due to Lower Potential Growth

►The comeback for holders of risky assets was interrupted this week as growth concerns took over the agenda

►US assets managed to eke out gains with REITS especially having a good week

►EM and International equities had down weeks both in local currency as well as in USD terms

►On a YTD basis US Small Cap and REITS are in the lead – up 11.8%

►Commodity indices had a poor week as energy prices suffered large losses this past week

►In the context of balanced 60/40 strategies US strategies out-performed strategies more globally focused

►Aggressive, domestically focused multi-asset class strategies under-performed less risky options

►Within equities, Growth has slightly under-performed Value in 2019 but over the last year Growth remains solidly ahead

►Thus far in 2019 more aggressive multi-asset strategies have outperformed

Currencies:

►The USD had a strong week, up over 1%, despite ongoing budget discussions in Washington and a pause by the Fed in raising rates

►For 2019 we still expect the USD to depreciate slightly

►A depreciating USD will boost international asset returns – we expect this effect to persist in 2019

►A big question mark for this coming week is what happens to Brexit (yet again) – sterling is being massively tossed around depending on political prospects

►The Yen is now in an Up Trend phase as investors remain risk averse and the Yen is usually considered the “safe” trade

►RResource-oriented currencies experienced losses last week relative to the USD  as oil and gas prices trended down

►In general, FX volatility has increased substantially in the last couple of months

Commodities:

►Commodity indices continue in a Down Trend even as oil markets have found some stability

►Oil and gas were down big last week due to warmer weather in the US and oversupply conditions

►Soybean prices should be firming up as a trade deal with China gets some traction

►Gold and Silver while slightly down last week are becoming a hedge for nervous equity investors

►However, we still view US Treasuries as the best hedging option for equity risk

This Coming Week:

►While risky assets have recovered we still think that risk is being shunned at the moment

►While not comfortable, US investors should allocate more money to non-US stocks due to their lower valuations and a depreciating USD

►The strong USD will not persist much stronger as the FED appears close to the end in terms of interest rate hikes

►The Value/Growth discussion is being overshadowed by sector rotation but on a risk-adjusted basis we believe that higher allocations to Value are warranted

►We are also watching out for any jump in inflationary expectations (which have been trending down)

►Tariffs are inflationary and will be reflected in higher consumer prices eventually

►Our biggest concerns revolve around a slowing global economy – The IMF recently lowered 2019 growth numbers to 3.5%

►We still see a risk on/off market this year making it difficult for short-term investors – probably best to extend horizons

►In general, investors seem very pessimistic making contrarian plays interesting from a tactical perspective

Earnings season in the US is in full swing

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To read our full weekly report please click here

ic J. Weigel

Global Focus Capital LLC

eweigel@gf-cap.com

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