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By: Defred Folts III, Managing Partner, Chief Investment Strategist & Eric Biegeleisen, CFA, Managing Director, Research

SUMMARY

  • Our model research continues to indicate that U.S. equities remain overvalued while Emerging Market equities remain somewhat undervalued. Furthermore, with the prospect of a more dovish Fed, EM equities may benefit from a weaker U.S. dollar. Developed Asia equities remain undervalued but with limited growth prospects resulting in a mixed outlook, while European equities remain negative.
  • The outlook for U.S. Treasury Bonds remains stable as concerns over slowing global growth along with dovish signals from the Fed in June have driven down yields on U.S. Treasuries. In terms of Credit, high-yield spreads have widened out and are less supportive of credit conditions.
  • The outlook for Gold remains positive as low real yields (nominal yields less inflation) along with the prospect of a more dovish Fed and weaker U.S. dollar make this an attractive asset class. However, the outlook for Commodities remains somewhat negative as concerns over a potential slowdown in global economic growth have increased.

OUTLOOK

Following the correction in the global equity markets in May, Fed Chair Jay Powell took the opportunity during the FOMC meeting in mid-June (and then again during a speech at the Council On Foreign Relations later in the month) to indicate that uncertainty over trade negotiations between the U.S. and China along with increased downside risks to the economy mean that the Fed is now leaning towards lowering short-term interest rates as soon as the next FOMC meeting in July.

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 the health of the U.S. economy for the remainder of 2019 and into 2020. Although U.S. equities are overvalued, even in the face of deteriorating fundamental factors, markets can become even more overvalued for periods of time before correcting towards fair value.

Emerging Market equities remain somewhat undervalued and the investment case has been strengthened by the prospect that the Fed may cut interest rates as early as July with the market anticipating upwards of three twenty-five basis point (0.25%) cuts by year end. These actions by the Fed could further benefit EM equities by contributing to a weaker U.S. dollar which when coupled with the decline in U.S. Treasury yields may lower the borrowing costs for EM sovereign and corporate entities.

The outlook is mixed for Developed Asia equities and remains negative for European equities. In both countries, yield curves remain inverted, suggesting limited growth opportunities. While Japan remains undervalued, a catalyst for investment has not yet materialized.

The U.S. Treasury Bond outlook remains unchanged. U.S. Treasury yields continued to decline as concerns mounted over the prospects for a global growth slowdown. Credit remains concerning as both high-yield and investment-grade spreads have continued to widen.

The outlook for Gold remains positive due to a variety of contributing factors including low real yields (nominal yields less inflation); the prospect of a more dovish Fed; and, positive investor behavioral factors which may be driven by increased geo-political tensions that tend to highlight the allure of gold as a safe haven asset. The outlook for Commodities remains negative as the downside risks to global growth continue to place downward pressure on the demand for commodities.

Currently Cash & Equivalents are 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 (shortterm) 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.

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 July 2, 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.