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SUMMARY

  • Triggered by the global pandemic, global equity markets declined precipitously in March. Our model research indicated pockets of relative value, particularly in German and Emerging Market equities.  Even after the steep decline, S. equities remain relatively overvalued according to our research.  Japanese equities remain undervalued but without a catalyst for reinvestment.
  • The model’s preference in fixed income favors a blend of intermediate-term and shorter-term S. Treasuries. The outlook for Credit further deteriorated during the global equity market correction.
  • Gold maintains a longer-term positive outlook as governments around the world continue to provide unprecendented monetary and fiscal stimulus. The outlook for Commodities remains negative in the short-term as growth in the global economy has temporarily been halted.

 

OUTLOOK

The crisis surrounding the global pandemic caused a market maelstrom the speed of which has been steeper than any other sell off in U.S. history.  U.S. equity markets declined nearly 34% from the peak in mid-February to the trough in late March.  Our model research had suggested a defensive posture leading into February and continuing throughout March.   As we ended March, the model research identified some opportunities with attractive valuations alongside a catalyst for reinvestment.  These include German and Emerging Market equities.  These equity markets have not only suffered material price declines but whose prices may already reflect a particularly dire economic scenario.  This suggests the potential for a rebound (bear market relief rally) in the shorter-term.  Although U.S. equities also suffered declines in March, and may benefit from both unprecedented monetary interventions by the Federal Reserve as well as unprecedented fiscal stimulus  from Congress in the form of the CARES Act, our valuation measures indicate that they remain relatively overvalued.  While Japanese equities remain undervalued, the catalyst for reinvestment remains absent.

The model’s preference in fixed income favors a blend of shorter-term and intermediate-term U.S. Treasuries.  During March, the yield on the 10-year U.S. Treasury declined to an unprecendented low yield of 0.31% intraday.  The Federal Reserve’s QE-infinity program (money printing “without limit”) as well as the Government’s overwhelming fiscal stimulus act may lead to a debt explosion which could result in rising interest rates over the long-term that could negatively impact longer duration Treasuries.  The research views this as a longer-term risk rather than immediate.  The outlook for credit is negative as the decline in global equity markets was accompanied by a material widening of credit spreads.  The stability of corporate borrowers and their ability to rollover and/or repay their debts in the face of now nearly closed global economy has been identified by our research as a potential obstacle to an economic recovery.

Gold has an attractive outlook longer-term based on the potential for the eventual inflationary impact from massive global government interventions in response to the COVID-19 crisis.  However, in the shorter-term gold may face headwinds from the deflationary deleveraging by a slowing global economy and the need for overleveraged investors to sell gold to raise cash to pay their debts.  The outlook for Commodities remains negative in the short-term as global growth has ground to a halt.

Short-Term Fixed Income & Cash continue to serve as dry-powder to reinvest in assets at potentially lower prices in the future.

ABOUT 3EDGE ASSET MANAGEMENT

 3EDGE is a multi-asset investment management firm that utilizes a proprietary model to analyze market valuation metrics (long-term), economic forces (medium-term), and investor behavioral factors (short-term) that we believe drive the global capital markets.  Our team of professionals draws on decades of investment management experience and their research in quantitative methods, including system dynamics, machine learning, artificial intelligence, and multi-player game theory to seek to identify undervalued and overvalued asset classes across the globe that may be poised to enter a period of market outperformance or underperformance.  While we aim to generate attractive risk-adjusted returns, we also prioritize risk-management in an effort to limit portfolio declines for our clients, particularly during periods of extreme market disruptions.  Our clients include individuals, family offices, institutional investors, and registered investment advisors.

Change to Asset Allocation Across Major Asset Classes

(Trailing 12 Months)

3EDGE Growth Strategy

3EDGE Total Return & ESG Strategies

3EDGE Conservative Strategy

 

 

DISCLOSURES:  This commentary and analysis is intended for information purposes only and is as of April 6, 2020.  Allocations shown above reflect target allocations for the 3EDGE Growth, ESG, Total Return and Conservative Strategies (the “Strategies”) as of the date the allocation change was made and individual investor allocations may differ.  This commentary does not constitute an offer to sell or solicitation of an offer to buy any securities.  The opinions expressed in “View from the Edge” are those of Mr. Folts and Mr. Biegeleisen and are subject to change without notice in reaction to shifting market conditions.  This commentary is not intended to provide personal investment advice and does not take into account the unique investment objectives and financial situation of the reader. Investors should only seek investment advice from their individual financial adviser. These observations include information from sources 3EDGE believes to be reliable, but the accuracy of such information cannot be guaranteed.  Investments including common stocks, fixed income, commodities and ETFs involve the risk of loss that investors should be prepared to bear.  Investment in these Strategies entails substantial risks and there can be no assurance that the Strategies’ investment objectives will be achieved.  Past performance may not be indicative of future results.

*Short-Term Fixed Income and Cash includes cash, cash equivalents, money market funds, and fixed income funds with an average duration of 2 years or less. Intermediate-Term Fixed Income includes fixed income funds with an average duration of greater than 2 years and less than 10 years.  Real Assets (Gold & Commodities) includes precious metals such as gold as well as investments that operate and derive much of their revenue in real assets, e.g., MLPs, metals and mining corporations, etc.