Asset Allocation

In this update to the two Special Reports on FX hedging of global equity portfolios with nine different home currencies, published in 2017, we show that BCA’s proprietary dynamic FX hedging strategies have consistently added value to global equity portfolios. We value quant models as an important input in our decision-making process, but we do not suggest any investor to slavishly follow them, because models cannot capture all the important fundamental changes, as demonstrated in the details of this report.

We do not see a 1990s type of backdrop but we do see a departure from the 2010s. Structural forces make it unlikely that we will return to the 1990s heydays for LSE. However, evolving cyclical forces provide tailwinds over the next market cycle. In this Special Report we provide a quantitative assessment of what investors can expect.

While we are sympathetic to the view that the Fed could temporarily achieve a soft landing, we are skeptical that it could stick that landing for very long. Stocks could strengthen into year-end, with small caps potentially leading the charge. But the rally will fizzle out next year as the global economy begins to sink into recession.

Carbon credits as an asset class are becoming increasingly investable. Given that the structural bull case for this asset class is compelling, strategic investors should long carbon credits. However tactical investors should book profits or consider merits of a short position, since prices are likely to correct over the next 12-24 months.

Stocks should continue to rally in the near term, but investors should prepare to turn more defensive towards the end of the year in advance of a recession in 2024.