When we increase the allocation to one asset class in portfolios, we have to decrease the allocation to another. That’s why our tactical asset allocation (TAA) decisions come in pairs, where we underweight and overweight relative to our strategic asset allocation (SAA) weightings. The specific numerical weights from the chart relate to a EUR balanced portfolio, and can be adjusted for different profiles.
We believe US stocks will outperform Eurozone stocks. With recession our base case in Europe, the stubbornly high earnings per share (EPS) expectations for euro area equities are likely to become increasingly challenged, especially relative to EPS expectations for US equities.
Emerging market sovereign debt offers additional yield over Eurozone government bonds. The loss in value of Russian bond has been a drag, but that’s now behind us. Credit risk for most EM sovereigns is unaffected by the war in Ukraine.
We believe Emerging market (EM) stocks will outperform global equities as EM equities are trading close to a record discount compared to global equities. As EM growth stabilizes and monetary policy eases, especially in China, we expect EM stocks to be well supported.
Near term uncertainty remains elevated with risks increasingly skewed to the downside. We reduce our exposure to Eurozone equities and instead prefer to increase our holding in US dollar cash as we view this safe-haven asset as providing protection to our portfolios.
