Asset Allocation Update - July 2020
Insights

Asset Allocation Update – July 2020

Clipping back risk appetite

We all know – or rather, have heard of – Warren Buffet. One of his more famous mantras is: to get rich you need to be fearful when others are greedy, and greedy when others are fearful. Of course, this is much harder than it sounds, particularly over the long term. But it captures well how we have traversed asset markets in the short but tumultuous recent months, raising our appetite for risk near the March nadir, and then reversing back down to neutral at the end of June.

Risk appetite can be a loaded term. Put simply, it reflects expectations of how volatile assets might be rewarded, with high prospective returns per unit of risk associated with greater risk appetite, and vice versa.

In March, as economies were buffeted by “sudden stops” in economic activity as countries were shut down to contain the spread of Covid-19, fear percolated the valuation of pretty much every asset class. Investment grade corporate bonds were compensating investors for 50 times the historical rate of defaults, for instance, while several equity indices were priced at or close to book value, stripped down to the realisable value of assets in liquidation. Yet at the same time, unprecedented global policy stimulus was released into credit and labour markets. We believed that although sharp recessions were likely – far greater than any experienced in post-war history – this would ultimately prove to be a temporary shock, with the US economy for instance regaining Q4-2019 levels by the end of 2022.

So in March and April we “leaned in” to the prospect of super-normal returns in select risk markets that seemed well placed to benefit. By investing in highly rated corporate bonds and raising and rotating our equity exposure towards the US and away from cyclical areas of Japan and the UK, we simultaneously raised both the quality and quantity of risk in total return multi-asset portfolios.

Fast forward to today, and the world feels different – taking some risk off the table feels prudent, hence our move to neutral. Equity markets and credit spreads have recouped much of what was lost in March, denting valuations (Figure 1). Expectations of reward, or asset returns, are necessarily lower than they were in March. And at the fringes, uncertainty is mounting – from second waves of the virus to trade tensions/Chinese geopolitics, US elections and how labour markets emerge once furlough and support schemes fade.

Figure 1: The year so far: a round trip for many asset markets (1 January = 100)
Round trip for many asset markets chart

Source: Macrobond, June 2020

This move does not put us in a defensive mode; indeed, it leaves us quite exposed to both equity and credit risk that we continue to favour within overall risk neutrality. Policy easing continues to run at an extraordinary clip: China, Japan and Europe are among regions that are upping their games, and we expect a fresh dose of US fiscal stimulus to come through by late July-early August. Lower effective discount rates are a powerful support as economies recover and we are keen to be long assets that are most impacted, such as IG credit. As economies reset in early stages of recovery, higher equity multiples might also be expected.

Furthermore, although investor positions have been built from the March shakeout, there seems considerable room for further increases: allocations by non-bank investors to equities, for example, are still at the low end of the post-Lehman crisis period and below historical averages, with elevated offsetting cash balances.

We aren’t fearful; just a bit less greedy.

Figure 2: Asset allocation snapshot
Asset allocation snapshot chart

Columbia Threadneedle Investments, 3 July 2020. The mention of any specific shares or bonds should not be taken as a recommendation to deal.

20 July 2020
Toby Nangle
Toby Nangle
Global Head of Asset Allocation & Head of Multi-Asset, EMEA
Share article
Share on linkedin
Share on email
Key topics
Related topics
Listen on Stitcher badge
Share article
Share on linkedin
Share on email
Key topics
Related topics

PDF

Asset Allocation Update – July 2020

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

Related Insights

18 March 2024

Steven Bell

Chief Economist, EMEA

Will sticky inflation stop the US cutting interest rates?

Disappointing data has dampened expectations around US rate cuts. We think that pessimism is overdone and explain why.
Watch time - 6 min
11 March 2024

Steven Bell

Chief Economist, EMEA

Interest cuts to start in June

Consensus for June rate cuts from the Fed and ECB are firm. What are the odds that the UK, seen as a laggard, could follow through too?
Watch time - 5 min
6 March 2024

Steven Bell

Chief Economist, EMEA

Interest rates, growth and financial markets

In the absence of significant economic contraction, central banks look set to hold off cutting rates until wage inflation eases. What can we expect from financial markets?
Read time - 4 min
28 March 2024

The Good, the Bad and the UK Stock Market

After an exceptional 2022 the UK stock market reverted to type, underperforming in 2023. With money continuing to disappear from the market, two potential catalysts for change have emerged.
Read time - 5 min
26 March 2024

Fixed Income Desk

In Credit - Weekly Snapshot

In Credit Weekly Snapshot – March 2024

Our fixed income team provide their weekly snapshot of market events.
Read time - 5 min
26 March 2024

Ebele Conroy

Investment Analyst, Global Research

Joe Horrocks-Taylor

Senior Associate, Analyst, Responsible Investment

Green machines: the future of transport

The transportation sector has a significant impact on global emissions, but technology innovations, policy changes and shifting behaviours can reduce this. How are the different modes progressing?
Read time - 5 min
true
true

Important Information

The research and analysis included on this website has been produced by Columbia Threadneedle Investments for its own investment management activities, may have been acted upon prior to publication and is made available here incidentally. Any opinions expressed are made as at the date of publication but are subject to change without notice and should not be seen as investment advice. Information obtained from external sources is believed to be reliable but its accuracy or completeness cannot be guaranteed.

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Our Capabilities

We offer a broad range of actively managed investment strategies and solutions covering global, regional and domestic markets and asset classes.