Asset Allocation | Portfolio Updates
When markets go through regime changes, you need to throw out the conventional ways of investing. Take a common approach – business cycle investing. Here, investors split the cycle into four sections or quads – early cycle, mid, late, recession – then look at past relationships to pick the best assets for each.
Currently, most such investors say we are in the fourth quad (recession) and recommend being long bonds, long gold, short (other) commodities, and short equities. Yet only the short equities has worked this year. The rest have failed: bonds are down 13%, gold is down 7%, and commodities are up 25%. Some even added real estate (REITS) to mitigate against inflation, yet REITs are down 25% this year.
Our approach has been different. We argued that we are entering a new regime driven by higher interest rates. This means everything that rose in a low interest rate environment will face pressure – whether bonds, equities, real estate or crypto. The one asset we like to be long is the least fashionable one – cash.
Why switch to cash? For one, you will hold on to your capital. Remember, rule number one of investing is ‘survive’. Second, as central banks raise rates, cash will start to give you some returns.
Finally, look at the performance of cash over the decades. It delivered 100%+ returns over the 1970s and 1980s but has steadily declined to single-digit returns over the past decade. With such poor recent returns, you can be sure investors are underweight cash as they found other ways to get returns.
So, we like to be long what others are underweight, namely cash, and stay short what others are overweight, namely bonds and equities. This is the ‘everything breaks’ portfolio.
Elsewhere, we are neutral on both commodities and crypto. On equity sectors, we like to be overweight energy, large cap value, traditional infrastructure, clean energy, and healthcare. We would underweight homebuilders, large cap growth, consumer discretionary and staples, and technology.
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.