By DeFred Folts III, Managing Partner, Chief Investment Strategist, and Eric Biegeleisen, CFA, Managing Director, Research Portfolio Manager

Summary

    • Japanese equities remain fairly valued and may benefit from improved growth prospects supported by sustained monetary and fiscal stimulus. U.S. equity markets remain overvalued by our measures;  however, monetary and fiscal stimulus remains supportive. Should recent increases in short-term interest rates in Emerging Markets continue, this could signal a monetary tightening and create a headwind for continued growth. European equities remain mixed.
    • Even as interest rates have risen somewhat, U.S. Treasuries continue to provide an unattractive risk-return trade-off. While the Fed continues to support credit markets, risks remain due to the record amount of corporate debt.
    • Gold continues to be supported by negative real interest rates. Commodities remain relatively undervalued and could benefit from an increase in global demand and the potential for further dollar weakness.

Outlook

Our model research continues to find equity asset classes relatively attractive presently thanks to continued monetary and fiscal support and narrowing high-yield credit spreads. Japanese equities remain the most attractive equity asset class, benefitting from more reasonable valuations, positive prospects for economic growth and recent positive price momentum. During January, the relative attractiveness of Emerging Market equities declined somewhat as a result of an increase in short-term interest rates in China and emerging Asia, but the outlook for EM equities is positive overall. U.S. equities remain decidedly overvalued but continue to benefit from monetary and fiscal stimulus, continued tightening of high-yield credit spreads, favorable investor behavior and positive Q4 2020 corporate earnings reports. The outlook for European equities is mixed; they are firmly in overvalued territory, but like other equity asset classes also benefit from tightening credit spreads.

Although yields on U.S. Treasuries have risen recently, they continue to yield less than the market’s expected inflation rate (negative real yields) across all maturities, which presents an unattractive risk-return trade-off. The combination of investors reaching for yield and the Fed’s continued tacit support of the credit markets (corporate bonds), credit spreads – the difference between corporate and government bond yields – have narrowed even further. However, with record amounts of corporate debt outstanding and with record low yields for high-yield bonds, there is heightened risk that any accident in the financial markets could cause credit spreads to widen abruptly.

The continuing story of negative real yields (nominal yields less expected inflation) and the prospect for additional fiscal stimulus from the Biden administration continue to make Gold a relatively attractive asset class provided  real yields remain negative. Commodities remain attractive due to the longstanding relative undervaluation of real assets, the prospect for U.S. dollar weakness and the potential for an increase in demand from China and the rest of Asia.

Short-Term Fixed Income & Cash typically serves as dry-powder for clients, though much remains deployed in the opportunities presented above.

About 3Edge Asset Management

3EDGE is a multi-asset investment management firm that utilizes a proprietary model to analyze market valuation metrics (long-term), economic forces (medium-term), and investor behavioral factors (short term) that we believe drive the global capital markets. Our team of professionals draws on decades of investment management experience and their research in quantitative methods, including system dynamics, machine learning, artificial intelligence, and multi-player game theory to seek to identify undervalued and overvalued asset classes across the globe that may be poised to enter a period of market outperformance or underperformance. While we aim to generate attractive risk-adjusted returns, we also prioritize risk-management in an effort to limit portfolio declines for our clients, particularly during periods of extreme market disruptions. Our clients include individuals, family offices, institutional investors, and registered investment advisors.

DISCLOSURES: This commentary and analysis is intended for information purposes only and is as of January 6, 2021. This commentary does not constitute an offer to sell or solicitation of an offer to buy any securities. The opinions expressed in View From the EDGE® are those of Mr. Folts and Mr. Biegeleisen and are subject to change without notice in reaction to shifting market conditions. This commentary is not intended to provide  personal investment advice and does not take into account the unique investment objectives and financial situation of the reader. Investors should only seek investment advice from their individual financial adviser. These observations include information from sources 3EDGE believes to be reliable, but the accuracy of such information cannot be guaranteed. Investments including common stocks, fixed income, commodities, ETNs and ETFs involve the risk of loss that investors should be prepared to bear. Investment in the 3EDGE investment strategies entails substantial risks and there can be no assurance that the strategies’ investment objectives will be achieved. Past performance may not be indicative of future results.

Real Assets (Gold & Commodities) includes precious metals such as gold as well as investments that operate and derive much of their revenue in real assets, e.g., MLPs, metals and mining corporations, etc. Short-Term Fixed Income and Cash includes cash, cash equivalents, money market funds, and fixed income funds with an average duration of 2 years or less. Intermediate-Term Fixed Income includes fixed income funds with an average duration of greater than 2 years and less than 10 years.

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