The Big Picture - Global Asset Allocation 2022 Q3

Major central banks are tightening aggressively, bond yields are up sharply and most asset prices are down. With US treasury yields at levels not seen in more than a decade, and our belief that global recession risks are growing, we choose to go Overweight government bonds within our Model Asset allocation (for the first time since 2016). We balance this by also going Overweight real estate. These changes are achieved by reducing equities (to Underweight), investment-grade credit (still Overweight), high-yield credit (to zero) and cash (Overweight). Across regions, we favour UK and emerging market (EM) assets.
Model asset allocation
In our view:
- Government debt outlook is improved by the sharp rise in yields. We increase to Overweight.
- Real estate (REITS) offers the best returns. We increase to Overweight.
- Equities are handicapped by the growing threat of recession. We reduce to Underweight.
- Corporate investment-grade (IG) spreads may widen further. We reduce but stay Overweight.
- Corporate high-yield (HY) may suffer wider spreads and higher defaults. We reduce to zero.
- Cash rates are now overshadowed by government bond yields. We reduce but stay Overweight.
- Commodities have risen sharply and may consolidate lower. We remain at zero.
- Gold contains a geopolitical risk-premium and appears expensive. We remain at zero.
- Regionally, we favour the UK and EM.
Our best-in-class assets (based on 12m projected returns)
- UK equities
- EM real estate
- EM IG
- USD cash