Portfolio Playbook: Diversifying into international
A weakened dollar could be a catalyst for non-US stocks. In September, we've upped our international stock allocation and still favor defensive sectors. Optimize your portfolios with our monthly outlook and allocation guidance.
A weakened dollar is a potential catalyst for outperformance in non-US stocks.
The global picture remained broadly stable. Economic data has performed in line with expectations and macro volatility was subdued. While growth has been below the long-term trend and last year’s rate,1 it’s enough to maintain positive employment growth. Business and consumer sentiment surveys seem to have adjusted and stabilized in response to global trade policy uncertainty. The full impact of tariffs on both growth and inflation, however, may likely be more visible this quarter, as the front loading of imports and inventories wears off.
Our barometer of global risk appetite marginally improved over the past month. But our macro framework remains in a contraction regime for the global economy for the 15th consecutive month, as it continues to point towards below-trend and decelerating growth.
In stocks, we continue to favor defensive sectors and factors. The recent dovish turn by the Federal Reserve has led to a meaningful repricing of monetary policy expectations, with narrowing yield differentials between the US and the rest of the world. Our models indicate this trend is likely to continue. While the US dollar still enjoys higher yields than its developed market peers,2 this anticipated erosion of the US yield advantage has historically put downward pressure on the dollar,3 providing a potential catalyst for outperformance in non-US stocks.
In bonds, we maintain a moderate overweight in duration and underweight in credit risk.
Business cycle
- Recession doesn’t appear imminent
- Broad-based economic statistics not collapsing
- Credit spreads still contained
Risk profile
- Risk appetite is modestly improving
- Leading economic indicators show below trend and decelerating demand
Policy implications
- Federal Reserve likely to look beyond tariff price shocks
- Rate cuts are likely imminent
Business cycle
- “Soft landing” for economy
- Resilient growth
- Contained inflation
Risk profile
- Above-trend global economic rate
- Improved policy backdrop
- Risk-on sentiment
Policy implications
- Contained inflation
- Easing Fed policy
Business cycle
- Deteriorating sentiment
- Rising trade and monetary policy uncertainty
- Reaccelerating inflation
- Prolonged recession
Risk profile
- Deteriorating leading economic indicators
- Flight to quality
Policy implications
- Tightening Fed policy
Asset allocations to consider:
In September, we've added international and still favor low volatility US stocks.
A challenge for tactical investors is preparing for the expected and anticipating the unexpected. The tactical asset allocation (TAA) framework from the Invesco Solutions team is designed to enhance a long-term strategic asset allocation (SAA) by making portfolio tilts based on near-term market views.
We’ve also provided alternative asset allocations should market conditions change. Institutional investors seeking to implement these allocations can subscribe to the dynamic model portfolios for regular portfolio updates. The tactical, dynamic factor rotation shown below is also utilized in the Invesco Russell 1000® Dynamic Multifactor ETF (OMFL).
As the market environment changes, explore our product solutions for portfolios and tools to guide client conversations.
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Our new suite of Income Advantage ETFs are designed to provide consistent income. Plus, they include stocks for growth potential.
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Diversify with alternatives
Ready to invest in private markets and alternatives? Get asset class views and allocation guidance in Alternatives Playbook.
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Client conversations
Connect with clients by sharing conversations designed to help them adopt sound investment principles, navigate markets, and stick with investment plans.
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Larger, more established companies may be unable to respond quickly to new competitive challenges such as changes in consumer tastes or innovative smaller competitors. Returns on investments in large capitalization companies could trail the returns on investments in smaller companies.
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