- So far, the recent market turmoil in risk assets reaching limits of the other selloffs in the bull market
- An opportunity to increase global equity exposure and reduce government bonds
Last June, we reduced the equity long positions in our model portfolios since we felt equity markets had gotten ahead of the economic and corporate fundamentals and additional good news looked unlikely in the shorter term. We maintained our high-yield and credit positions. Our scenario at that time was to wait for a consolidation or pull-back in equity markets and indeed, this was the case in August and again now in October. Global equities have fallen by around 10% from their July peak, leaving the EuroSTOXX 50 index flat over 12 months.
The recent market moves have washed out many of the long positions in equities, so we have reassessed our neutral view on the asset class.
WHY INCREASE EQUITY NOW?
While absolute valuations are not low, the equity risk premium is still high historically, and taken together with the recent market corrections we believe there is now a stronger case for investing in equities over bonds. Business cycle indicators suggest we are still mid - cycle, backed by alack of wage inflation around the world and where we are in the interest - rate cycle.