Asset Management: Multi-Asset Insights

Views on recent market volatility

recent-volatility

Three key takeaways

  1. We have not changed our positioning as a result of recent market volatility. We remain modestly overweight equities relative to bonds and within equities we are tilted towards foreign equities.
  2. The key elements of our thesis for these views remain in place.
  3. Successful investing requires the appropriate time horizon. Our 12-36 month horizon has proven to add value over time and is well understood by our clients. This approach has been the foundation of the team’s success.

Further details:

  • While this market cycle has been more stable than most, periods of volatility like what we’ve experienced over past week are not unusual. This is especially true during periods when the Fed is contemplating policy tightening.
  • Last fall we had a decline of almost 10% that was erased in only 3 weeks and the market moved higher from there. This demonstrates the risk of short term decision making without the support of fundamentals.
  • Each episode is different. In this case we have a combination of emerging market fears combined with concern about a potential Fed policy error.
  • Key thesis for remaining overweight equities is in place:
    • Valuation: We see the vast majority of valuation metrics in a range around fair value (Price-to-earnings, Price-to-book, Price-to-cash flow, discounted cash flow, etc.). Q2 earnings season was decent particularly ex-energy.
    • Cycle: Below trend but signs of health. Purchasing Managers Index (PMI) data, a key indication of the manufacturing sector’s economic health remains supportive in US and Europe. Additionally, employment and housing data in US remain supportive. China is a concern but at this time does not offset health elsewhere.
    • Policy: Fed has left themselves an out but even modest tightening should not problematic to the global economy. European Central Bank (ECB) and Bank of Japan (BOJ) put remains in place, particularly if longer term inflation expectations do not recover meaningfully. BOJ could act soon given 7% appreciation of the yen vs. the dollar.
  • Time horizon for our views is 12-36 months. The market continues to focus on shorter and shorter time horizons leaving fewer participants focusing on medium to long term. Our discipline has been key to our success.

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