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Asset Allocation Views: Opportunity Amid Transformation

Disruptive trends and fatter tail risks highlight the importance of selection within asset classes and regions.

As we look ahead to 2022, our base case is for positive global growth and elevated inflation in the near term. Though we see inflation moderating during the year, there are upside risks to our forecast.

We believe growth assets, such as equities and credit, will tend to deliver positive returns over the next year. However, we expect greater dispersion in performance across sectors and regions, a common feature of mid-cycle periods.

Indeed, in our Asset Allocation Outlook, “Opportunity Amid Transformation,” we discuss fundamental shifts occurring at the “ground level” of the economy that we believe will have implications for top-line growth and inflation, but also create distinct investment opportunities in a number of sectors and regions. Specifically, we discuss disruptive, and potentially transformative, trends in labor, technology, transportation, and energy.

Investment implications

With fuller valuations, risk assets are more vulnerable to exogenous shocks and policy missteps. In our view, the risk of a policy mistake has increased as monetary and fiscal stimulus recedes and authorities attempt to engineer a growth handoff to the private sector. This creates the potential for “fatter tails” (more divergent positive and negative outcomes) that highlight the importance of selection – within and across asset classes.

The outlook for equities

We remain broadly constructive on equity market risk. We expect to see substantial differentiation across regions and sectors, which warrants a more selective and dynamic approach.

Within developed markets, we remain overweight U.S. equities, and have positioned our overweight in cyclical growth sectors. We also have exposure to Japanese equities, which tend to have a valuation cushion along with beta to cyclical growth. We view European equities as more challenged due to a combination of unfavorable sector composition, energy price headwinds, and growing unease around the COVID-19 outlook.

In emerging markets, we continue to be constructive on select exposures within Asia. Simultaneously, we are closely monitoring regulatory developments in China and evolving geopolitical tensions in the region. We remain overweight emerging Asia, with an emphasis on hardware technology and equipment that will be foundational to regional as well as global growth.

From a sector perspective, we retain a preference for secular growth trends like digitalization and sustainability. In particular, we believe that semiconductor manufacturers, factory automation equipment providers, and green energy and mobility suppliers all stand to benefit. We complement this with exposures that may benefit from a more inflationary environment; these are companies that we believe have significant barriers to entry and strong pricing power that can potentially harvest inflation through price increases, such as global shipping companies.

Rates, credit, and currencies

We expect government bond yields to trend higher over the cycle as central banks raise rates, but in a multi-asset portfolio context, we believe in the role duration can play as a diversifier. Consequently, we continue to maintain some duration exposure. We maintain a modest overweight position on U.S. TIPS (Treasury Inflation-Protected Securities) in multi-asset portfolios. Although inflation breakevens have moved significantly higher, in our view they still do not fully price in an appropriate inflation risk premium.

We find corporate credit appears fully valued. As such, we see little opportunity for spread compression outside of unique opportunities identified by our credit analysts. Securitized credit, on the other hand, still offers attractive value in our view, particularly in non-agency U.S. mortgages, where a strong consumer balance sheet and housing market underpin improving credit quality at spreads that we see as cheap relative to corporate bonds.

Lastly, on foreign exchange, the U.S. dollar still screens rich on our valuation models, particularly against emerging market (EM) currencies, but we should not presume the dollar is destined to weaken in an environment where EM economies and central bankers continue to face challenges.

For detailed insights into our views across asset classes, please read our December 2021 Asset Allocation Outlook, “Opportunity Amid Transformation.”


Erin Browne is a managing director and portfolio manager in the Newport Beach office, focused on multi-asset strategies. Geraldine Sundstrom is a managing director and portfolio manager in the London office, focused on asset allocation strategies.

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All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. References to Agency and non-agency mortgage-backed securities refer to mortgages issued in the United States. Investing in foreign-denominated and/or -domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Diversification does not ensure against loss.

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