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Asset allocation highlights - Removing the crutches

Financial markets entered the final quarter of 2021 on an edgy note due to some hawkish central bank rhetoric, slowing global growth and rising idiosyncratic risks.  

Investors may focus on persistent supply constraints and rising input price issues slowing a ‘return to normal’ rather than on the more upbeat medium-term economic prospects.

According to our latest asset allocation highlights, investors may be distracted by the risk that persistent supply constraints and rising input prices slow a ‘return to normal’ and lose sight of the more upbeat medium-term economic prospects. 

In terms of allocation, our net equity exposure remains overweight versus our benchmarks. We are also overweight risky assets such as commodities and emerging market (EM) local currency debt. Our portfolio diversifiers include a long position in gold.


We are overweight equities: In the short run, investors might focus on the downside risks (global growth, China, US monetary policy), but we believe the medium-term outlook for equities is good thanks to a solid economy and strong earnings growth. What is more, equities still look attractive versus bonds despite their rich multiples.

On a regional basis we are overweight US equities. We also maintain an overweight in Japanese equities: After an excellent earnings season, earnings revisions have started to pick up relative to the rest of the world. Market sentiment, the chart-technical configuration and investor positioning are favourable in the medium term, even after the sharp market rise that sent the Nikkei 225 to its highest since August 1990.

We are neutral on EMU equities overall, with a long on small caps and on banks. Small caps should benefit from being high beta and from their more attractive valuations relative to large caps. Moreover, European fiscal expansion (in the form of the Recovery Fund) and ECB support should benefit small caps. European banks are highly sensitive to the yield environment and should benefit from the expected rise in long-term yields. Earnings revisions and their relative valuations are supportive.

Government bonds

Being underweight interest rate risk is a strategic position given the favourable economic outlook, the current low level of yields and the prospects of a normalisation of monetary policies (even if only gradually and cautiously). Nevertheless, we decided to reduce our underweight in US long-term bonds in mid-September as inflation indicators peaked and signs of less buoyant growth momentum emerged.

Check out our asset allocation monthly for a comprehensive analysis of our views on:

  • Credit
  • Currencies
  • Commodities
  • Thematics

Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

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