Foresight Strategy Update – It’s time
Recessionary winds are blowing and it’s time to pull down the sails. In equities, the tactical rally back after the correction in the first half of the year appears to have run its course. Tuesday’s US CPI was a timely reminder that the inflation threat has not eased and markets are rightly focusing on the prospect of a global recession.
Asset allocators are currently faced with a predicament. Are we already half way through a recessionary equity market drawdown or can the market rally back to its peak? Our end of cycle indicators suggests a recessionary equity market drawdown of 20% – 40% is likely to begin soon, so we don’t think the risk adjusted return on positioning for another tactical rally is large enough. It’s time to reduce further the exposure to Growth assets. The only indicator we have that suggests the next leg down is not imminent is the continued sell-off in the US 2-year note. Normally the 2-year note rallies before the equity market drawdown begins.
Move further underweight Growth assets. We cut our exposure to Japan and Australia and trim our exposure further to the US. These adjustments are moderated by keeping our large underweight in EM and reducing our underweight in Europe.
Cut the underweight in Defensive assets. The global economy is slowing sharply due to tighter financial conditions. Over the next 6-12 months, markets are likely to begin pricing central bank easing, so we move from a large underweight in Australian and global bonds and US credit to small underweight. We move underweight in global infrastructure and raise our overweight in cash.