Our investment recommendations proved timely during the first half of 2018, leading to significant outperformance of a global multi-asset benchmark portfolio. The major highlights included:
- Heading into 2018 we warned that U.S. inflation would reappear and catch fixed-income investors wrongfooted. The outcome would be the bond bear market working its way further out the yield curve, with the benchmark U.S. 10-year Treasury yield punching through its 2017 highs and rising sharply to 3% (pulling up yields in most of the other major economies), before consolidating in a lateral trading range for several months. Looking ahead, we expect yields will experience another material wave higher, likely beginning later this year.
- We pared back equity exposure near the January 2018 peak on expectation that the sharp rise in bond yields and increasing protectionist rhetoric would leading to a correction/consolidation phase after the previous strong bull run. Our recommendation for a mix of cyclical and defensive sectors also proved correct. Heading forward, we expect equities to move higher with leadership shifting to select laggard markets. Nonetheless, regional and sector selectivity will still prove crucial.
- We successfully bet on a spike in implied equity volatility early this year, while the 10-year Treasury yield was taking a run at our 3% target. This recommendation is symbolic of a broader theme that the dynamics between equities and bonds changed materially this year, and yields are now likely to rise much more meaningfully during any risk-on phases than had been the case earlier this cycle. This will create bouts of stock market volatility and restrain/narrow further equity upside.
- We have provided several successful long and short recommendations on commodities and related assets over the past few years, capturing the major swings. In recent months, our call to short base metals and gold has proven rewarding. Looking ahead, gold should remain vulnerable, while energy is at modest risk in absolute terms and likely to weaken versus base metals.
- Our work on weak-link economies or so-called “canaries” to the next global recession is already panning out in a series of profitable equity, currency and fixed-income recommendations, both from a relative and absolute return perspective. We expect this to be a theme that generates sizable gains over the next few years.
Please let us know if you would like a list of our latest investment recommendations.