By WisdomTree’s Model Portfolio Investment Committee
WisdomTree’s Model Portfolio Investment Committee produces quarterly commentary on its latest asset allocation views. These views are as of September 30, 2020, and impact trade and rebalance decisions for the Model Portfolio strategies that the team manages. These views, outlined below, are followed up with specific investment strategies that help express them. Financial professionals can access the complete list of strategies and trades as they relate to our Model Portfolios here.
Relative to the MSCI All Country World Index (NASDAQ:ACWI), we maintain our overweight position in U.S. equities going into the fourth quarter. The economic recovery has leveled off following a strong initial rebound. For the past several months, equities have traded in tandem with the likelihood for further fiscal stimulus and have stagnated as the outlook for such stimulus has dimmed. High-flying growth names have seen some of the wind come out of their sails in September but still remain well in the black for the year. The election remains the great wild card, with the Senate nearly as large a factor as the White House. Between the two sides there are stark differences in tax policies, growth initiatives and regulatory regimes that will have far-reaching ramifications for all corners of the equity markets. Quality still remains undervalued and serves as the anchor of our equity models, and we look to the election results to once again potentially be a catalyst for value outperformance.
Developed International Exposure
We remain underweight in international developed equity markets relative to ACWI. Europe had done an admirable job of containing the coronavirus in the summer months, but the recent rise in new cases and the impact on economic activity give us cause for concern. That said, we are encouraged by the historic EU Recovery Fund agreement, which should provide a boost to economic growth over the next several years. In Japan, newly elected Prime Minister Suga should keep the stimulative policies of Abe’s regime intact, headlined by no increases to the consumption tax for the next decade. However, we would want to see a more significant pickup in global economic growth before increasing exposure there, due to the multinational and cyclical nature of Japan’s equity market.
Emerging Markets Exposure
We maintain a modest overweight position in the emerging markets (EM) region relative to ACWI. EM equities have led all major global equity regions for most of the third quarter. The continued downward trend in the U.S. dollar since March has provided a tailwind, but the global risk-off sentiment in September has blunted the rally. Nonetheless, China has managed to put the pandemic and global recession behind it and will, remarkably, show economic growth in 2020. Coronavirus cases have remained stubbornly high in India, Brazil and Russia. These commodity-exporting countries have struggled with sustained low energy prices but could benefit from a possible global reflationary environment in 2021. Tensions between the U.S. and China have never been worse, but we remain convinced that growth opportunities in the private sector will be sufficiently shielded from a political dispute. We continue to lean into these companies with a core allocation that avoids state-owned enterprises.
Fixed Income Exposure
We are retaining our exposure across sectors in the fixed income allocation and recommend a defensive duration position. The money and bond markets have noticeably improved from the dislocations seen back in March, with funding market gauges back to pre-pandemic readings. The record-breaking losses in corporate bonds – both investment-grade and high-yield – of mid-March continue to reverse, with spread levels retracing close to 80% to 90% of the peak widening. Nevertheless, credit valuations remain attractive. A focus on screening for quality, however, will remain paramount. Based on the Federal Reserve’s (Fed) modest purchases of corporates on its balance sheet, our credit view is that market participants continue to perceive the Fed programs as a signal of support rather than a needed lifeline for corporate issuers. The Fed’s new monetary policy framework, which focuses on average inflation targeting, represents a new way going forward for the policy makers. The Fed will no longer be raising rates in a pre-emptive fashion to ward off potential inflation pressures, but rather will let inflation exceed its targeted 2% goal for “some time.” With this new Fed approach, a pickup in economic momentum could pressure longer maturity rates, leading to further steepening in the Treasury yield curve. While lingering uncertainties mean that additional setbacks cannot be ruled out, ongoing support from the Fed, well-capitalized financial institutions and the prospect for further fiscal policy stimulus have created the potential for economic and credit market improvement. Against this backdrop, we made no further adjustments to our allocations, and maintain our overarching themes of reducing duration relative to the benchmark and a tilt toward credit versus rates.
WisdomTree manages a Volatility Management portfolio that thoughtfully combines different alternative strategies to form a single portfolio. Our options-writing strategy has delivered strong and stable returns as implied volatility remains elevated. Positions in merger arbitrage and Black Swan strategies have continued to consistently generate positive absolute returns since the first quarter. Our anti-beta holding continues to act as a true diversifier, performing exactly as expected in a global equity rally and helping rein in the total portfolio risk level. We think that this alternatives sleeve can deliver a unique return stream with diversified risk drivers for investor portfolios.
Important Risks Related to this Article
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This material contains the opinions of the author, which are subject to change, and should not be considered or interpreted as a recommendation to participate in any particular trading strategy or deemed to be an offer or sale of any investment product, and it should not be relied on as such. There is no guarantee that any strategies discussed will work under all market conditions. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results.
The WisdomTree Model Portfolio Investment Committee is also sometimes referred to as the Asset Allocation Committee.
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