View the printer friendly version here. 

SUMMARY

  • The onset of the Coronavirus alongside recent changes in several economic indicators have increased the level of uncertainty for global economic growth. Correspondingly, our research indicates a less positive outlook for Japanese and Emerging Market equities. However, the outlook for U.S. equities is relatively more favorable while the outlook for European equities remains negative.
  • The model’s preference in fixed income favors intermediate-term U.S. Treasuries, both nominal and inflation-protected, which can provide support should the market’s expectations for a global economic recovery falter. The outlook for Credit remains neutral.
  • Gold maintains a positive outlook from declining real yields (nominal yields less inflation) and continues to prove itself as a safe haven against global uncertainty. The outlook for Commodities has declined given the heightened economic uncertainty.

OUTLOOK

The Coronavirus (2019-nCoV) is creating uncertainty related to its potential impact on economic demand and supply chain management centered in Asia. At the same time, recent changes in several economic indicators such as falling bond yields, global manufacturing contraction and flattening yield curves are calling into question the expansion and prospects for a synchronized global recovery fueled by monetary stimulus and trade truce.

While U.S. equities remain overvalued by our measure, the model finds U.S. equities to be less vulnerable to current economic uncertainties than non-U.S. equities at this time. In addition, the U.S. Federal Reserve Board has more ability to further stimulate monetary policy than most other major central banks. The model’s outlook for European and Japanese equities remains constrained due to limited growth opportunities as evidenced by flat yield curves and negative interest rates, as the European Central Bank and the Bank of Japan have little maneuvering room to lower rates further. The outlook for Emerging Market equities has been negatively impacted by troubling signs of rising inflation, specifically in China, India and Brazil. The potential combination of increased inflationary pressure and a slowdown in economic growth could subject emerging market countries to stagflation, a simultaneous low-growth and inflationary environment. Central banks in emerging market countries may find themselves caught in a difficult balancing act between their desire to lower rates to support economic growth vs. to tighten monetary policy to constrain inflation and support their currencies.

The model’s preference in fixed income favors intermediate-term U.S. Treasuries, both nominal and inflation-protected, which can provide support should the market’s expectations for a global economic recovery falter and rates decline. The outlook for Credit remains neutral as the threat of widening corporate spreads and bond defaults remains a risk.

Gold maintains a positive outlook from declining real yields (nominal yields less inflation) and continues to prove itself as a safe haven against global uncertainty. The outlook for Commodities has declined given heightened economic uncertainty and the potential for reduced demand.

Short-Term Fixed Income & Cash remains reasonably attractive on an absolute yield basis. However, gold and U.S. Treasuries provide the potential for upside opportunity and downside protection.

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 February 5, 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.