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In our monthly Multi-Asset update we describe the translation of our CIO View into the CIO View model portfolio
by Vincenzo Vedda
Chief Investment Officer
Concentration risks play an important role in portfolio construction. In a U.S. portfolio consisting of 60% equities and 40% bonds, at current volatility levels and using modern risk modeling, approx. 90% of the risk is accounted for by equities. If we also consider that the ten largest stocks in the S&P 500 account for a cumulative 46% of the index's risk, the combination of these two figures shows that, including all correlation effects, roughly 40% of the risk of the 60/40 portfolio is caused by just 10 stocks. This does show very clearly that the top 10 stocks in the S&P 500 can almost be considered a separate asset class, with a very large impact on the performance of the overall portfolio.
Further curve steepening ahead, more pronounced in EUR
Chart
Source: Bloomberg Finance L.P., DWS Investment GmbH as of 5/7/25
We expect Fed and ECB to ease more. Medium-term factors are balanced. Some leading indicators seem to have bottomed out, e.g. Asset & Style Cycle has turned and may give a “Boom” signal if it improves again next month. Inflation and fiscal risks have increased after Trump. In our view, duration is no longer a clear-cut diversifier as the risk for higher inflation seems to be larger than for a U.S. recession, at least in the short term. On the plus side, credit and housing markets are stabilizing but are still softish, industrial data remains weak as well. Increase duration bias through higher yield levels.
We stick to our neutral duration stance
Source: DWS Investment GmbH as of 5/7/25
Overall duration
We see a short-term correction potential (up to 5%) and want to use that opportunity to add further risk as the current environment supports risky assets in our view. Central banks are normalising interest rates. Decent U.S. economic growth and positive economic dynamics should boost risk assets, despite high valuation levels. Earnings growth should be supportive if U.S. corporate tax cuts materialise. The rest of the world faces more uncertainty. Europe has some optionality as it is still cheap, leading indicators seem to have bottomed and a ceasefire in Ukraine could be a positive catalyst. The MSCI World's 75% U.S. weighting is vulnerable.
We reduce our risk preference to -1
Source: DWS Investment GmbH as of 5/7/25
On equities, our overall risk preference is at +1. We see a higher chance for a reset if seasonality and policy support in the U.S. isn't matched by earnings and economic growth in lite of current valuation levels. But we would add equity risk into a market dip (i.e. S&P 500 -5%). For Europe and Japan, we reiterate that both regions are strategically attractive, but in the short term we are neutral. We maintain our "more defensive" sector positioning. Despite the strong performance of communication services in January, earnings trends and valuation levels still look promising for the sector. Healthcare has suffered from U.S. political uncertainty and rising yields since early September. However, defensive sectors such as healthcare tend to outperform during cycles of interest-rate cuts. We reiterate our +1 rating on both sectors. In terms of styles, we prefer the S&P 500 Equal Weight in this Trump 2.0 scenario. We reiterate our Barbell preference for Value and MinVol as one of the least correlated pairs at low valuations. In fixed income we believe that it’s too early to expect a sustained rally in Treasuries in January without a clearly visible bullish driver, so we remain neutral for now, but with a slight long bias, the same applies to Bunds. In currencies, risk diversification capabilities still justify a neutral position on the U.S. dollar versus the euro, although USD is no longer cheap.
Consider EUR carry, fundamentals and valuations more attractive
Chart
Source: Bloomberg Finance L.P., DWS Investment GmbH as of 5/7/25
EUR/USD shows itself detached from yield differential
Chart
Source: Bloomberg Finance L.P., DWS Investment GmbH as of 5/7/25
This allocation shows how we implement the above-mentioned CIO View into a Multi-Asset portfolio of liquid securities
Source: DWS Investment GmbH as of 1/30/25 This allocation may not be suitable for all investors and can be changed at any time without notice
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