Based on our current macroeconomic assessment of the world economy we see a solid and well synchronized expansion. We consider the monetary policy of the major central banks as moderate and supportive for further growth. This picture is also supported by our systematic indicators monitoring macroeconomic and financial-market data as well as global data surprises.
This benign environment should support assets with a higher risk profile, especially equities. Hence we are currently overweight equities vs. bonds.
Within the equity allocation we think regional equity markets with higher beta should outperform markets with lower beta. We prefer equities from the Eurozone , Japan and emerging markets . U.S. equities should be supported by the tax cuts which we expect to lead to higher earnings and repatriation of cash that might be used for share buy backs and higher pay-out ratios.
In the fixed-income space we think that assets with safe-haven characteristics like U.S. Treasuries should suffer from less demand and hence be underweighted. U.S. high-yield bonds have had a very strong performance as the overall risk appetite for many investors is high and the concerns around oil related companies have vanished. However, we think valuation is stretched and we underweight high yield as an asset class for valuation reasons by closely monitoring important technical levels in spread terms.
Following the strong macro background argument and the relatively loose monetary policy of the European Central Bank (ECB) we think rates in the Eurozone are too low. We express this view by being short duration via German 10-year interest-rate futures . Emerging-market bonds should be well supported by the positive growth environment and we consider them to be a more attractive investment than high yield at current levels. As the U.S. Federal Reserve Board is expected to reduce the support for the mortgage-backed-securities (MBS) market we feel better positioned by underweighting this asset class.
In currencies we think that the recent weakness of the dollar has lasted for a while but we don't want to fight the trend at this stage. The reasons behind it seem to be a combination of large central banks shifting money back into European assets and the potential end of the extra loose monetary policy of the ECB. This could lead to an overshooting of the exchange rate and give us attractive levels to hedge parts of our foreign-exchange exposure. For now we stay put and harvest the positive performance contribution of the international exposure.
Source: Deutsche Investment Management Americas, Inc. as of 01/24/18
The chart shows how we would currently design a balanced, dollar-denominated portfolio for a U.S. investor taking global exposure. The risk exposure is taking into consideration the average risk profile of global asset-allocation portfolios in the United States. This allocation may not be suitable for all investors. Alternatives are not suitable for all clients.