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2015 Asset Allocation Themes

Asset allocation philosophy lies in three aspects:

  1. Market technicals and momentum: Market technicals can have meaningful short-term impact on asset prices.
  2. Macro fundamentals: Asset class returns are influenced by surprises in growth and inflation as well as central bank and fiscal policy.
  3. Valuations: Long-term mean reversion drives returns over long-term investment horizons. Beginning valuations levels are the strongest indicators of future returns.

Considered how the interplay among macroeconomic fundamentals,valuations, risks and market technicals is likely to impact the risk and return potential across global asset classes in 2015, investors should place the focus on tactical allocation and relative value.

Unlike strategic asset allocation, tactical allocation seeks a moderately active approach, which allows for a range of percentages in each asset class. Investors rebalance the percentage of asset held in various categories in order to take advantage of market pricing anomalies and certain situation in the market. When making tactical allocation decisions, investors need to be cognizant of changes to market liquidity, investor flows and price momentum. Additionally, adopting the “relative value” suggests investors take into account the value of similar assets.

Asset allocation themes

Equity Themes:

  • Favor U.S. equities; earnings will be the primary driver of returns. The equity risk premium in the U.S. relative to real rates remains close to its long-run average, reducing the probability of a sharp correction
  • Neutral on European equities, based on current fears about growth and deflation, with German bunds and CPI hovering at extremely low levels.
  • Favor Japanese equities on a currency hedged basis; abenomics has helped reverse Japan’s deep deflationary trend, largely due to Bank of Japan’s aggressive balance sheet expansion.
  • Attractive valuation and the potential for improving fundamentals in emerging markets equities, despite there are risks from rising rates and choppy growth in some rapidly-developing countries.

Fixed Income Themes:

  • Low yields, low inflation and generally supportive central bank postures
  • Neutral on high yield, though fundamentals remain favorable. There are buying opportunities in the recent technically-driven spread widening. Average issuer leverage is moderate while interest coverage is strong.
  • Favor emerging markets fixed income, given generally favorable valuations, supportive global market conditions and improving fundamentals.
  • Attractive valuation in European peripheral debt, U.S. non-agency mortgage-backed securities and emerging markets debt.
  • Modestly negative interest rate risk

Alternatives Themes:

  • Neutral stance on commodities; oil prices are hovering near bottom, though bouts of volatility may produce extreme outcomes.
  • U.S. TIPS and European inflation-linked bonds are attractively priced inflation hedges.
  • Neutral on private equity, largely due to the long-duration nature of the asset class. With the uptick in M&A activities,the market for exits is currently strong.

Currency Themes:

  • Believe the continued strengthening of U.S.dollar and further weakening of euro and Japanese yen.
  • Selective opportunities in emerging currencies, in particular, the Indian rupee and Mexican peso

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