Following a challenging September, Japanese and Emerging Market equities remain attractive due largely to relatively better growth prospects as signaled by the continued steepening of their yield curve measures in both regions as well as relative undervaluation. U.S. equities are increasingly overvalued by our measure. Support from the prospect of continued monetary and fiscal stimulus continues, though the timing and size are uncertain. German equities are mixed as the negative effects of an inverted yield curve are offset by the positive benefits from its yield curve becoming less inverted. Risks remain broadly to the equities outlook should a second wave of new coronavirus cases take root.
Fixed income generally remains heavily influenced by Fed policy actions which place the entirety of the U.S. Treasury market yielding less than expected inflation. Risks of continued widening in corporate credit spreads, that took place in September, makes the outlook for Credit mixed.
Gold continues to have a positive outlook despite a reprieve in September. Declining real yields alongside Fed stimulus measures taken to date as well as signaling by the Fed to leave rates unchanged until late 2023 continue to support the long-term outlook for gold. While the Commodities outlook has softened due to negative investor momentum, this may be transient should the economic recovery in China gain further steam.
Following the notable positive performance in August, it wasn’t too surprising to witness a sell-off in equities in the month of September. However, the sell-off was highly uneven as Japanese equities enjoyed positive returns for the month while U.S., German and Emerging Market equities finished in the red. Our model research continues to favor Japanese and Emerging Market equities as their respective yield curve measures continue to steepen, indicating the potential for future growth. The outlook for Japan is further bolstered by their better than expected recovery from the coronavirus. While EM equities had the tailwind of a declining U.S. dollar, which makes borrowing and repayment of their dollar-denominated debts easier, September brought a reversal as the dollar strengthened somewhat. One risk to this generally positive outlook for these equities would be continuing U.S. dollar strength. While still significantly overvalued by our measure, U.S. equities continue to be supported by monetary and fiscal stimulus though risks remain regarding the timing and size of future stimulus measures, which tempers this outlook. German equities are mixed as the negative effects of an inverted yield curve are offset by the positive benefits from its yield curve becoming less inverted. Risks remain broadly to the outlook for equities should a second wave of new coronavirus cases firmly take root.
Fixed income generally remains heavily influenced by Fed policy actions which place the entirety of the U.S. Treasury market yielding less than expected inflation. A small widening of credit spreads in September highlights the risks in this asset class. Risks of a continued unwind, i.e., a further widening of credit spreads particularly in the high yield market, makes the outlook for credit mixed.
Following two months of U.S. dollar weakness, the dollar strengthened somewhat in September providing a headwind for Gold. However, the Gold outlook remains firmly positive as negative and declining real yields (nominal yields less inflation expectations) more than offset the effects from recent dollar strength. Furthermore, signaling by the Fed regarding their intention to hold rates as is until late 2023 boosts the long-term outlook further. While the Commodities outlook has softened due to negative investor momentum as well as a small widening in credit spreads, should the economic recovery in China show signs of gaining further steam it could bolster the outlook for this space.
Short-Term Fixed Income & Cash typically serves as dry-powder for clients, though much was deployed to invest in the opportunities presented in Japanese and EM equities, gold, and commodities.
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.
DISCLOSURES: This commentary and analysis is intended for information purposes only and is as of October 2, 2020. 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, ETNs and ETFs involve the risk of loss that investors should be prepared to bear. Investment in the 3EDGE investment 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. View from the EDGE is a registered trademark of 3EDGE Asset Management, LP.