Nevertheless, we don’t feel compelled to chase assets today, preferring instead to build exposure in segments such as credit, where valuations are more dislocated from fundamentals than they are in stocks.
On a 12-month view, stocks probably will outperform bonds—indeed, after the strong returns in October, developed market equities are now marginally ahead of bonds in total return terms, Year-to-date.
But the notion that October’s price action can persist, unabated, into year-end is as implausible, in our view, as the US economy capitulating from unexciting expansion into outright recession.
We maintain a moderately pro-risk view over the medium term (12-18 months). We expect stocks to outperform bonds, credit to offer positive returns, and developed markets (DM) to lead emerging markets (EM). Longer-dated interest rates will probably rise but only slowly and modestly over this time horizon.
Nevertheless, at this time our quantitative models, together with the greater level of uncertainty in the economy, lead us to take a somewhat de-risked position.
We have temporarily reduced our stock-bond position to neutral, and have chosen to add risk instead in US high yield. We maintain a preference for DM over EM, but in reduced size, and lean modestly to US and eurozone equities within DM.
We are also overweight Australian bonds and underweight Canadian bonds, in a framework that leaves us neutral duration at the portfolio level.
As markets stabilise, our medium term views will likely prevail once more, but for the time being we believe a degree of caution is the prudent course.