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Beyond the Bear

Bear markets come and go. So will this one.

A History of Bear Markets
Our Views

Asset Class Detail

Global Equity

  1. U.S. Large Cap

    Volatility caused by the coronavirus pandemic has pushed valuations below long-term averages. Earnings expectations have been declining due to expectations of a global slowdown. The Fed has been providing underlying valuation support by cutting interest rates. We expect energy, industrials and materials to be impacted most during this slowdown. We expect growth sectors to hold up best while value-oriented sectors trade at extreme discounts. We therefore recommend a balance of growth and value. Long/short equity strategies should benefit from an increasingly bifurcated equity market and potentially dampen volatility during market downturns through alpha short positions and portfolio management.

    Current View: Positive
    Change: Increase
    (change from prior quarter)

  2. U.S. Small Cap

    Valuations are reasonable on a relative spread basis given low interest rates. With a recession being more of a concern due to the virus-induced slowdown, small-cap stocks face a lot of uncertainty. If the slowdown is short-lived, we expect small cap stocks to benefit. Long/short strategies may also capitalize on heightened volatility among small caps. Late-stage-growth companies that are pre-IPO also provide an interesting exposure to clients as valuations are increasingly attractive.

    Current View: Neutral

  3. Non-U.S. Developed

    The valuation gap that existed between the U.S. and non-U.S. developed markets has eroded this year as U.S. growth expectations and stock prices declined. Additionally, we’re not confident that Europe and Japan are well-equipped to weather a global slowdown. These economies are already in a negative rate environment and are not as insulated as the United States slowing global growth. We favor Small-cap exposure for enhanced alpha and diversification.

    Current View: Neutral

    Change: Decrease
    (change from prior quarter)

  4. Emerging Markets

    While loosening monetary policy in developed markets tends to be favorable for emerging markets and their currencies, we feel that Asia and Latin America are not as well equipped to contain the coronavirus pandemic. Additionally, these markets could be more negatively impacted by slowing global growth as many emerging markets are net exporters. Active management could be especially beneficial in these markets to help avoid trouble spots and capitalize on opportunities.

    Current View: Neutral

    Change: Decrease
    (change from prior quarter)

Global Debt

  1. Core Bond

    Treasury yields hit historically low levels after the coronavirus outbreak and the Fed is in now loosening mode. Long- duration bonds pose risks if the global slowdown is short-lived. Conservative investors should maintain a core bond allocation in short-to-intermediate duration, high-quality securities as a tail-risk hedge.

    Current View: Slightly Negative

  2. Investment Grade

    Spreads widened and yields increased. However, there could still be further widening as credit markets have tightened up with less liquidity. We expect to see a number of investment grade rated companies downgraded. As a result, active management in this sector is encouraged.

    Current View: Neutral

  3. High Yield

    High yield is experiencing significant spread widening amid the coronavirus-fueled volatility. Energy has seen the most deterioration. This sector could experience additional deterioration if the pandemic shuts down the economy longer than expected. We emphasize the better risk-reward opportunity in short-duration bonds in the higher-quality segments as they will hold up better amid high market volatility.

    Current View: Neutral

  4. Non-U.S. Developed

    Exceptionally low yields and continued accommodative central bank monetary policy creates an unattractive backdrop for non-U.S. sovereign debt. Corporate credit is susceptible to a global slowdown and potential recession due to the coronavirus-induced volatility.

    Current View: Slightly Negative

  5. Emerging Markets

    The sector continues to offer high absolute yields, attractive valuations, good fundamentals and price potential not found in most richly valued developed markets. Emphasis should be placed on hard currency, U.S. dollar-denominated debt.

    Current View: Slightly Positive

Diversifying Strategies

  1. Real Assets

    REITs and utility-related segments offer attractive yields and defensive characteristics in the slowing growth, low interest rate environment. Certain real-estate investments have become more attractive following recent tax legislation that provides meaningful tax incentives for investments in designated “opportunity zones.” We maintain a positive outlook on opportunity zone investments as we see significant tax benefits for investment in 2020.

    Current View: Slightly Positive

  2. Macro

    We hold a positive view of fundamental macro strategies that capitalize on current market themes. We have a slightly negative view on managed futures strategies given potential for short-term choppiness, a headwind for trend followers.

    Current View: Neutral

  3. Other Strategies

    We believe catalyst-focused, event-driven strategies are currently attractive given the favorable tax environment and low corporate borrowing rates. However, corporate deal flow has slowed amid the current market volatility.

    Current View: Positive