By: Defred Folts III, Managing Partner, Chief Investment Strategist & Eric Biegeleisen, CFA, Managing Director, Research
- Overall, little change in our outlook for all asset classes despite the major gyrations in markets both from the Federal Reserve as well as the White House. U.S. equities remain overvalued, while Emerging Market equities remain somewhat undervalued. Developed Asia equities remain undervalued but with limited growth prospects resulting in a mixed outlook; and European equities remain negative.
- The outlook for U.S. Treasury Bonds is more positive as increasing concerns over slowing global growth due in part to the increased threat of White House policy to impose further tariffs on China imports along with the recent FRB rate cut have driven down yields. However, this may be transient should either of these conditions be unwound through “jawboning”. Volatility in Credit spreads continues to be less supportive of credit conditions shorter-term.
- The outlook for Gold remains positive as low and declining real yields (nominal yields less inflation) make this an attractive asset class. The onset of a global competitive currency devaluation could also be a boost to the value of gold and gold may act as a hedge during the heightened uncertainty surrounding the latest increase in trade tensions. The outlook for Commodities remains somewhat negative as concerns mounting over a potential slowdown in global economic growth have increased.
For over a year, equities have been caught in a two-way battle between the US Federal Reserve Board’s interest rate policy setting and the ongoing trade tensions between the White House and China. When hitting new highs markets generally appeared poised to continue rising only to suddenly reverse course following remarks by Chairman Powell and/or tweets by the White House as the “political capital” of market highs allowed them to pursue their agendas. Similarly, when markets hit recent lows, it allowed the FRB and/or the White House to make indications of support for the US and/or the global economy thereby bolstering renewed market enthusiasm.
Despite the major gyrations that this jawboning has caused in the markets, our model research continues to indicate that U.S. equities are overvalued. In addition, the continued flattening and inversion of the U.S. Treasury yield curve is indicative of investor concerns about future growth of the U.S. economy for the remainder of this year and into next. However, while U.S. equities remain overvalued, even in the face of deteriorating economic factors, markets can become even more overvalued for periods of time driven by shorter-term investor behavioral phenomenon before correcting towards fair value.
Emerging Market equities remain somewhat undervalued. The investment case has been strengthened by the recent Fed interest rate cut. A reduction in US interest rates should be a net positive for Emerging Market economies who benefit from the lower cost of capital and a potentially weaker US dollar making it easier for EM governments and corporate entities to repay their largely US dollar denominated debts.
Developed Asia equities remain mixed and while European equities remain negative. In both geographical regions, yield curves remain inverted, suggesting limited growth opportunities. While Japan remains undervalued, a catalyst for investment has not yet materialized. A potential catalyst would be if the planned tax increase in Japan that is scheduled to begin in October were pushed off to a later date or outright eliminated.
The U.S. Treasury Bond outlook remains more positive. Increasing concerns over slowing global growth due in part to the increased threat of White House policy to impose further tariffs on China imports along with the recent FRB rate cut have driven down yields. However, this may be transient should either of these conditions be unwound through “jawboning”. Volatility in Credit spreads continues to be less supportive of credit conditions shorter-term.
The outlook for Gold remains positive as low and declining real yields (nominal yields less inflation) make this an attractive asset class. Furthermore, gold has continued to benefit from positive investor psychology as it continues to climb to multi-year highs. Additionally, gold may act as a hedge during the heightened uncertainty surrounding the latest increase in trade tensions; and, the onset of a global competitive currency devaluation could also be a boost to the value of gold. The outlook for Commodities remains somewhat negative as concerns mounting over a potential slowdown in global economic growth have increased.
Cash & Equivalents are slightly less attractive than they were given the Fed rate cut; however still reasonably attractive on an absolute yield basis. Cash is also attractive on a relative basis, as its risk-adjusted projected return compares favorably vs. U.S., European, and Asian equities. Since we place limitations on asset class exposures for risk management purposes (Gold and EM equities for example), Cash can be an important addition to a portfolio.
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 multiplayer 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 riskmanagement 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.
3EDGE TOTAL RETURN STRATEGY Change to Asset Allocation Across Major Asset Classes (Trailing 12 Months)
3EDGE CONSERVATIVE STRATEGY Change to Asset Allocation Across Major Asset Classes (Trailing 12 Months)
DISCLOSURES: This commentary and analysis is intended for information purposes only and is as of August 5, 2019. Allocations shown above reflect target allocations for the Total Return Strategy and Conservative Strategy (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. *Cash & Equivalents includes cash, cash equivalents, and money market funds. Fixed Income – Short Duration includes fixed income funds with an average duration of 2 years or less. Fixed Income – Long Duration includes fixed income funds with an average duration of greater than 2 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.