Understanding the Drivers of Consensus Expectations
• Global consensus is positioned for mid-cycle, and we agree with this assessment. The rapid increase in COVID-19 case numbers even in countries with relatively high vaccination rates is a key risk, but central banks are unlikely to remove support in this environment.
• Property seems to be underrated as a defensive asset and we think there is room for its allocation to lift. A lower allocation to fixed income is the most likely rebalance to make room for this shift.
• Global allocations to cash aren’t at historical lows, despite monetary policy settings at this threshold. Policy is unlikely to be tightened while the delta variant remains a risk and unemployment rates are still above pre-pandemic levels. We think there is room for consensus to lift its exposure to alternative assets to make room for a lower allocation to cash.
• Australia is our top equity market pick even though allocation to the Asian region ex Japan has drifted lower in the past couple of months. Australia has outperformed the region since January, and we expect this to continue. Lift your exposure to Australia.
• In fixed income, consensus has been increasing exposure to Japan in preference to both Europe and the US since the equity market recovery began. Our recently released DAA/TAA outlook highlighted Japan’s relatively weak growth outlook and this is probably driving its attractiveness in the asset allocation mix. Emerging markets have a historically large allocation in a sign that the search for yield is becoming important. EM’s struggle with COVID is also likely a factor supporting this move.