Investment Directions - Staycation or Vacation?
“Sell in May and go away” is an old maxim for investors. Evidence is mixed on its validity, but given this year’s rally, the temptation now is understandable. Our take: consider taking some profits and rotating into exposures that offer more resilience if volatility returns. Think of it as the investor version of a “staycation” and catch up on chores. With that in mind, our take on the major investor themes for the weeks ahead:
U.S. Equities: Reverting to Technology
We remain overweight U.S. equities, and one of our favored sectors is technology. Even with strong performance this year, we believe the sector remains appealing. Technology firms tend to have strong balance sheets and enjoy support from longer-term trends, attractive qualities in a late economic cycle. Furthermore, tech stocks have historically fared well through various yield
Developed Markets: Europe Poised for Revival?
Investors in Europe have had little reason for optimism for some time. But we expect European growth to accelerate this year given solid domestic demand. Valuations look attractive relative
to history, although political and trade risks linger. China’s efforts to stimulate its own growth could help export-heavy economies, such as Germany.
Emerging Markets: Brazil Waiting on Reform
Brazilian assets have underperformed the broad emerging market index this year, despite signs that economic growth is accelerating and earnings prospects remain intact. Instead, investors are focused on the negotiations around pension reform. We expect volatility around the negotiations to continue until reform is enacted.
Fixed Income: Return of the Benign Regime
The Federal Reserve’s rate hike pause has benefited fixed income sectors and assets across the board. Given the market expects rates to remain contained this year, these seemingly benign conditions could last for some time. In this environment, we favor quality, intermediate-term fixed income spread assets, such as agency MBS and high-grade corporates.
Factors: Insight into Relative Strength
Our factor-tilting model examines multiple metrics including relative strength, which uses a simple measure of 12-month price momentum to determine the trending behavior of each factor and compare market sentiment in one factor versus the others Changes in multiple factors’ relative strength have particularly driven our updated outlook this quarter: We’ve upgraded quality from neutral to overweight while downgrading minimum volatility and momentum.