• We are avoiding long duration fixed income in our portfolios. Interest rates should rise in the second half of the year as economic growth accelerates and global central banks step away from the “extraordinary measures” they employed during the financial crisis.
• We have exposure to five US equity sectors: financials, technology, biotech, energy, and aerospace & defense. Financials benefit directly from a higher interest rate environment in the US, as well as a more favorable tax and regulatory environment which is likely to develop. The pace of disruption of old industries by new products and processes has continued to accelerate, and technology and biotech give us exposure to this process of creative destruction. Revived economic growth will support global energy markets, and energy equities are under-owned by asset allocators, creating an excellent buying opportunity. Global military spending will increase in coming years, as US hegemony fades and a multi-polar world emerges—the aerospace and defense industry will be a beneficiary.
• The immediate threat of populist and nationalist politicians in Europe has subsided. Regaining power are centrists determined to implement reforms necessary to ensure the long-term stability of the Eurozone. This will support European equites, benefitting our positions in Eurozone equities and the European financial sector.
• Japanese equities are supported by the Bank of Japan’s ongoing aggressive monetary easing. The Bank of Japan is likely to be the last major central bank maintaining an aggressively easy policy stance, which should support Japanese equities and put downward pressure on the Yen.
• Emerging market equities benefit from positive capital inflows and represent attractive relative value. We expect global capital flows to remain supportive and emerging market equities to continue to “catch up” after years of underperformance.
• Gold’s status as an alternative currency should support it as geopolitical risks and policy uncertainty remain elevated. Furthermore, as an asset with low correlations to most others, it helps lower overall portfolio volatility.
This article was written by Court Hoover, Director of Research, at JAForlines, a participant in the ETF Trends Strategist Channel.