By: By: Defred Folts III, Managing Partner, Chief Investment Strategist & Eric Biegeleisen, CFA, Managing Director, Research
- While our research already found U.S. equities to be overvalued, the ongoing trade saga between the U.S. and China including the notable Chinese Yuan devaluation relative to the U.S. dollar has led our model research to lower the outlook on Developed Asia as well as Emerging Market equities; while European equities remain negative.
U.S. Treasury Bonds have a positive outlook due to investor concerns over slowing global growth as many of the world’s major central banks continue to lower rates and/or provide stimulus. The outlook for Credit remains negative as spreads continue to widen and investor fear increases.
Gold continues to have a positive outlook as low and declining real yields (nominal yields less inflation) make this an attractive asset class. In addition, gold may act as a hedge during the heightened uncertainty surrounding the U.S.-China trade negotiations and possible hard-Brexit. The outlook for Commodities remains somewhat negative as concerns mounting over a potential slowdown in global economic growth haveincreased.
- Cash and Equivalents are an attractive asset class providing a similar yield to longer duration U.S. Treasury bonds with less interest rate risk as well as providing dry powder to reinvest into risk assets at a more opportune time.
The ongoing U.S.-China trade negotiations coupled with slowing global growth and many of the world’s major central bankers easing has investors unnerved. August 2019 was a challenging month for equity markets as many major indexes closed negative, while gold and U.S. Treasuries provided positive returns for the month. Gold acts as a safe haven during periods of heightened uncertainty. Similarly, investors flocked to the perceived safety of U.S. Treasuries sending the 10 year yield from around 2% at the start of the month down to around 1.5% by month’s end – a very significant move in such a short span.
Our model research has some notable updates as a result of this and other market action. Most notably is the reversal from our positive to negative outlook in Emerging Market equities. Emerging Market (EM) currencies have weakened considerably relative to the U.S. Dollar, making EM dollar-based debt more difficult to service. In particular, the Chinese Yuan has declined more rapidly than a critical threshold we monitor, indicating heightened market risk. In addition, as the U.S. yield curve flattens/inverts indicating slower economic growth, EM exports to the U.S. may be negatively impacted. Finally, increased risk of a trade and/or currency war between China and the U.S. has weakened our measure of investor psychology, contributing negatively to our EM outlook. While further interest cuts by the U.S. Federal Reserve Board could boost the outlook for EM equities, it does not appear to be enough to offset these negatives at this time. U.S. equities remain overvalued. 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. While still deeply undervalued, Developed Asia equities have moved to a negative outlook with the continued inversion of our yield curve measure for Japan. Similarly, European equities remain negative as its yield curve measure remains inverted suggesting limited growth opportunities.
The U.S. Treasury Bond outlook is firmly positive as increasing investor concerns over slowing global growth has manifested in many of the world’s major central banks providing interest rate cuts and/or stimulus/easing measures to prop up their economies. While the U.S. central bank is involved in this easing too, with one-quarter of the world’s government debt having a negative yield, U.S. Treasury bonds at 1.5% remain attractive.
The outlook for Gold remains positive as low and declining real yields (nominal yields less inflation) continue to 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 reasonably attractive on an absolute yield basis providing a similar yield to a longer duration U.S. Treasury bond but with less interest rate risk. Cash also acts as dry powder to reinvest into risk assets should the opportunity arise.
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 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.
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 September 5, 2019. 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. *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.