Voya Multi-Asset Perspectives - Equity Support Remains Intact

Barbara Reinhard

Barbara Reinhard, CFA

Head of Asset Allocation

Although April started out as a bit of a tantrum for global equities, they managed to regain their composure and posted modest gains. Fixed income posted losses as bond yields marched higher, although a few credit related indexes were flat to slightly up for the month.

It has been a frustrating few months for equity investors. The 10% peak-to-trough decline in February followed by an early April re-test of the lows has left most equity markets with low single-digit losses year-to-date. There are a number of theories on what caused the first 10% correction in over two years, e.g., short volatility sellers and speculation of a U.S. trade war. We think there is a simpler explanation: a slowing in some measures of economic growth.

Slowdowns are common, especially after periods of strong growth such as we saw in 2017. The past 22 years have seen 13 episodes of slower growth that did not morph into recessions. On average, these periods tend to last five months. Most of the recent weakness has centered in the developed markets, which is a positive since growth slowdowns that lead to outright recessions tend to be more broad-based, engulfing both the developed and emerging markets.

In our view, growth will rebound in the coming months for a few key reasons. First, country and regional factors that played a role in 1Q weakness, such as unusually cold weather in the UK and strikes in France, are unlikely to repeat. Second, although many of our most reliable business surveys are down from their highs, readings are still consistent with a healthy pace of economic growth. Last, fundamental underpinnings are quite strong. Employment growth (Figure 1) supports consumer spending and household debt burdens are modest. Even though monetary policy is tightening, inflation-adjusted rates are quite accommodative.

In summary, we are positive on equities. The growth downshift in 1Q18 is likely to be temporary, positioning is meaningfully lower and sentiment, which was overly optimistic earlier in the year, reached mildly oversold levels. While global equities have struggled to regain upside momentum, we believe there is enough support to sustain the uptrend.

Tactical Indicators

Tactical Indicators

Figure 1. The U.S. Unemployment Rate is now under 4%, Last Seen in 2000

Figure 1. The U.S. Unemployment Rate is now under 4%

Source: Bloomberg and Voya Investment Management, data as of 4/30/2018.

Figure 2. The Recent Pullback Has Brought U.S. Equity Valuations below Their Three-Year Average

Figure 2. The Recent Pullback Has Brought U.S. Equity Valuations below Their Three-Year Average

Source: Bloomberg and Voya Investment Management, data as of 4/30/2018.

Figure 3. The S&P 500 Continues to Trade above its 200-Day Moving Average

Figure 3. The S&P 500 Continues to Trade above its 200-Day Moving Average

Source: Bloomberg and Voya Investment Management, data as of 4/30/2018.

Portfolio Positioning

Portfolio Positioning

Investment Outlook

During April, we concluded our annual strategic asset allocation review for the next 12 months. We remain positive on equities based on two strong fundamental global drivers: solid corporate profits and synchronous economic growth. We are mindful, however, that the cycle has advanced and labor markets have continued to tighten during 2018, particularly in the United States. Within equities, we are moving toward developed international and emerging markets and away from small- and mid-cap stocks in the U.S.

Our work indicates that markets outside the U.S. have more slack in terms of inflation and labor markets and therefore will not be tightening policy as quickly as the U.S. over the course of this year. Additionally, we see that some of the long-held reasons that the U.S. has been outperforming the rest of the world are falling to the wayside, with current account and budget deficit dynamics scoring much more favorably in the emerging markets than elsewhere in the world. Within developed international equity markets, we see them having signs of a slow but sustainable growth trajectory and more accommodative monetary policy, which should favor their equity markets over the U.S. for the next 12 months. To be sure, our 10-year capital market assumptions still forecast higher returns for the U.S.; but over the next one to three years, we think the U.S. may lag the rest of the world.

In terms of fixed income, we still believe equities will outpace bonds but we have scaled back our duration underweight. We recognize bond yields have come quite a long way from the lows of mid-2016, when 10-year U.S. Treasurys were at 1.36%, and the rise in yields has ameliorated some of the material richness in bonds. Nevertheless, we are still underweight duration, but less so than in 2017. We remain underweight high yield and find better value in senior loans, which can benefit from higher short-term interest rates. We also maintain our underweight to international fixed income, as yields are unfavorable.

Past performance does not guarantee future results.

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