- U.S. equities (particularly large-cap growth equities such as the S&P 500 index) remain significantly overvalued. In contrast, non-U.S. equities notably Developed Asia (Japan) and Emerging Markets exhibit more favorable valuation measures and could experience a period of investment outperformance in 2020 and beyond. European equities are relatively less attractive than other international equities and may continue to struggle due to limited growth prospects generally and as evidenced by the sustained manufacturing recession in Germany.
- The model’s preference in fixed income remains favorable towards short-term U.S. Treasuries and short-term Credit.
- Gold maintains a positive outlook from declining real yields (nominal yields less inflation). In addition, gold continues to prove itself as a safe haven against geopolitical uncertainty. The outlook for Commodities has improved after years of underperformance as global economic prospects begin to stabilize.
With a strong finish to the year U.S. equities (particularly large-cap growth equities such as the S&P 500 index) remain significantly overvalued. The price-to-sales ratio of the S&P 500 Index has reached its highest level since such data has been collected. In addition, S&P 500 profit margins (earnings per share / sales per share) are near all time highs and far above long-run averages.
Valuation measures for non-U.S. equities notably Developed Asia (Japan) and Emerging Markets are more attractive than in the U.S. Beyond more attractive valuations, the economic prospects for Japan are strengthening while a positive investor psychology has now emerged. Emerging Markets are benefitting from ongoing economic stimulus measures from central banks particularly in China where short-term interest rates have reached their lowest levels since August of 2016. Similarly, in Brazil, rates are also continuing to hit new lows. In addition, investor behavior in the emerging markets is also now more positive than in prior months. However, caution is still warranted as signs of inflationary pressures in the emerging markets could present a headwind. European equities are relatively less attractive than other international equities and may continue to struggle due to limited growth prospects generally and as evidenced by the sustained manufacturing recession in Germany.
The model’s preference in fixed income remains favorable towards short-term U.S. Treasuries and short-term Credit. The yield generated from intermediate-term bonds does not provide adequate compensation for the potential decline in bond values from rising interest rates. Gold maintains a positive outlook from declining real yields (nominal yields less inflation). In addition, gold continues to prove itself as a safe haven asset against geopolitically uncertainty. The outlook for Commodities has improved after years of underperformance as global economic prospects begin to stabilize benefiting from a lessening of trade tensions and continued monetary stimulus from the People’s Bank of China and The Federal Reserve Board. In addition, the stimulus has helped to narrow credit spreads and lower financing costs for commodities producers particularly in emerging market countries. While Short-Term Fixed Income & Cash remain reasonably attractive on an absolute yield basis there are currently more attractive investment opportunities in non-U.S. equities, commodities, and gold.
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 January 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.