By DeFred Folts III, Managing Partner, Chief Investment Strategist, and Eric Biegeleisen, CFA, Managing Director, Research Portfolio Manager
- Japanese equities are reasonably valued and continue to benefit from the Bank of Japan’s aggressive monetary policy. U.S. equity markets have never been more overvalued in our analysis; however, they continue to benefit from monetary and fiscal stimulus. Although European and Emerging Market equity valuations have also become stretched, better growth prospects are indicated by our yield curve measures.
- U.S. Treasuries continue to yield less than the market’s expected inflation rate. The Fed continues to support credit markets though risks remain due to the record amount of corporate debt outstanding.
- Gold continues to benefit from a further decline in real interest rates. Commodities are relatively undervalued and remain attractive due to the potential for an increase in demand for materials from an economic recovery in 2021, particularly from Asia.
After a strong year for the global capital markets in 2020, our model research continues to maintain a constructive outlook for global equities and real assets entering into 2021. While European and Emerging Market equity valuations have become stretched, non-U.S. equities still remain attractive due to continued monetary stimulus and better growth prospects as indicated by our yield curve measures. Japanese equities are reasonably valued and also benefit from the Bank of Japan’s aggressive monetary policy and positive market momentum. In addition, U.S. dollar weakness continues to act as a form of financial easing for the global economy and may benefit EM equities in particular. Our analysis indicates that U.S. equity markets have never been more overvalued; however, they continue to benefit from monetary stimulus, fiscal support and positive investor psychology. For the time being, investors continue to look beyond the current surge in coronavirus cases towards a potential economic rebound once the various vaccines are distributed and a wide segment of the population is inoculated. However, many potential risks remain, including changes to U.S. tax policy, unexpected increases in inflation, rising interest rates, inability of corporations to service and/or refinance their debts, and geopolitical tensions, e.g., Iran, North Korea, and Taiwan, among others.
U.S. Treasuries 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. Based upon the Fed’s continued tacit support of the credit markets (corporate bonds), credit spreads – the difference between corporate and government bond yields – remain narrow. However, risks remain due to the record amount of corporate debt outstanding.
As expected inflation continues to rise, real interest rates have fallen further into negative territory (nominal interest rates less expected inflation), providing a favorable outlook for Gold. Commodities remain attractive due to relative undervaluation of real assets and are bolstered by U.S. dollar weakness and the potential for an increase in demand from an economic recovery in 2021, particularly 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.
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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