Tip:
Highlight text to annotate it
X
Today we're discussing asset allocation recommendations as part of our 2014
outlook - are we in the eye of the storm? I'm Brian Jacobsen and you
are On The Trading Desk.
Welcome. They are all sorts of ways to slice and dice the investment universe.
In the equity side you can divided in terms of large versus small, value versus
growth, by sectors, fixed-income, there are all sorts of different ways you can do
that as well.
What we tried to present in our asset allocation recommendations,
is what we think is a fair way of thinking about it. It's not the
only way by any stretch of the imagination, but what we're going to
present for you here
are practical ways to look at asset allocation. And so,
here's how we're packaging our recommendations neutral positioning for
equities
is the percentage of market capitalization meeting the
classification criteria of a broad market index.
Because the fixed income market tends to be dominated by sovereign debt
we chose to represent the neutral weight as 50 percent.
The strategic positioning represents our guidance for investors with the time
frame of three years or longer.
The tactical positioning in the pie charts represents our guidance for investors
with the time horizon
of less than one quarter. And so, let's start with our view of developed
markets verses emerging market equities.
Strategically there's still likely long-term growth in emerging markets
but not every emerging market economy is going to emerge.
Some may submerge. Tactically, as the developed economies slowly grow
emerging markets are like high leverage place on that growth.
For example, Mexico is almost an amplified way to invest in US growth.
We prefer to avoid commodity oriented emerging markets because their
currencies can depreciate.
And so, strategically were biased toward emerging markets
but with stock selection being more important than country selection.
Tactically, where biased toward developed market equities.
And now let's look at US
versus non-US developed equities. S,trategically
the consensus seems to be that the US is doomed to low growth
We think this stance ignores the ability of US businesses to adapt and thrive in
a changing world.
Sector selection is likely more important than country selection.
Tactically, valuations are attractive outside the US
and growth estimates of the US economy are likely too. negative
For these reasons, we're recommending a neutral allocation
both strategically and tactically for US and non-US developed
equities. An important point that we wanted to make
when thinking of dividing the equity market between value and growth
is why not have both. We think that there are actually some tremendous valuation
opportunities
within the growth space, because so many people have a pessimistic view
a future growth. So why not have the best of both worlds by mixing the two.
For those reasons, strategically look for real growth
which could be in traditional value sectors. We think the theme for the next
few years
will be to identify mispriced growth opportunities.
That means looking for value stocks in growth sectors, and growth stocks in value
sectors.
Tactically, industrials, energy and technology,
not just information technology, remain our favorite areas.
Growth with the value characteristics or value with growth characteristics
seems to offer the best investment opportunities. With that said,
where underweight valuable strategically and tactically
Finally for equities,
when it comes to looking at large versus small, we think that it actually makes
more sense to look at the economic exposure of the business that you're
investing
It's perhaps the case that the midcap space
is going to be the sweet spot for the next few years. So strategically
there isn't a compelling valuation or thematic reason to overweight
any particular category whether its large or small. Tactically,
large cap stocks are attractive, but some large-cap companies may be tempted to
overpay for acquiring small cap companies.
And now with their fixed-income recommendations, we're going to start by
looking at
duration. Strategically,
the fed's projections call for lower rates until 2015
Until the Fed increases its target for the federal funds rate
we don't think we'll see a sustained move up in interest rates.
That does not mean we won't see volatility though. Tactically,
the Fed and other central banks will likely keep short term rates low
until the end of 2015. Thus we think there is little reason to fight the
Central Banks.
Foreign bonds may offer better tactical opportunities than US bonds
as the Fed is closer to raising rates then say the European Central Bank.
Strategically were neutral. Tactically were biased toward long-duration
fixed-income.
Because we believe interest rates will stay low for at least the next year,
were comfortable taking on a little bit more duration risk
with our portfolios and were also comfortable with credit risk.
If we had to pick between the two though we would prefer more credit risk
over duration risk. So in terms of credit risk exposure
strategically, default rates are low but investors need to be careful about new
issuances
Some credit risk might not be worth taking on. Tactically
we think default rates will continue to fall which should be good for high-yield
debt.
The rise in rates from May 2013 to August 2013
flushed out some of what we thought were the excesses in the riskier part of
the fixed income market.
For those reasons we biased our recommendations towards high yield fixed
income both strategically and tactically.
And finally we're going to take a look at fixed-rate versus floating rate debt.
So strategically we prefer fixed rate short term debt over floating rate debt.
Until the end of the year buying floating rate debt might be like buying
insurance for an
unlikely event. Tactically some floating rate debt may be prudent,
but it really depends on the credit quality of the issuer.
In general we prefer to leave the decision to a portfolio manager
who does bottom-up credit analysis and we're biased toward fixed-rate both
strategically
and tactically.Well that brings us to the end
our market commentary for the Outlook for 2014.
We started with the question: "Are we in the eye of the storm?"
and we don't believe that we are. We don't necessarily think there's going to
be smooth sailing ahead of us
because the world is always filled with all sorts of waves that are going to
buffet against the ship that you're sailing on,
but we don't think we're in the eye of the storm where there's any
imminent danger for any major market correction.
Too many people we believe are still stock in this crisis mentality
where a crisis is just moving around the corner
and we don't think that's the case. So for 2014
are we in the eye of the storm ? No. We don't believe that we are.
So until next time, I'm Brian Jacobsen. stay informed.
you to fund investing involves risks including the possible loss of principal
for investments are specially volatile and can follow a rise dramatically due
to differences in the political and economic conditions on the host country
these risks are generally intensified in emerging markets told fund's prospectus
for additional information on risks
carefully consider a fund's investment objectives risks charges and expenses
before investing
worker prospectus and if available a summary prospectus containing this and
other information visit Wells Fargo dot com forward slash advantage funds read
it carefully before investing
funds are not happy I see ensure nothing carotene any lose value