ETF Securities Research Blog

April 2017: Getting more constructive on US assets

For April, our equity model suggests to remain neutral on US equities for the first time since August 2016. Our bond model suggests increasing allocation to government bonds as well as US investment grade corporates, while remaining neutral on US high yield as CDS levels are rising. The commodity model is going underweight all commodity sectors with the exception of industrial metals and livestock (see table below).

Our tactical portfolio continues to have 45% in equities, 45% in bonds and 10% in commodities. The S&P volatility index (VIX) still stands between its historical average and its lower band, suggesting a more balanced split between equities and bonds, while commodities will always remain at 10%.

For the first time since August 2016, our CAPE (Cyclically Adjusted Price to Earning) valuation model is neutral on US equities from previously underweight. The model also suggests reducing allocation in mainly European country equities (France, Spain, the Netherlands and Denmark), while going overweight Canada, Brazil, India, Russia and Turkey.

A change in direction in US and Europe inflation and interest rate expectations over the past three months has sent a bullish signal for bonds since March 2017. Combined with readings of each constituent CDS (Credit Default Swap) level, the bond model increases the weight of each constituent with the exception of US high yields. For the latter, concerns over rising CDS offsets the bullish signal from inflation and interest rate expectations, reducing our US high yields position to neutral. Meanwhile we double our position in US investment grades as CDSs in this sector recently crossed its lower band on the downside.

The contrarian model – applied to commodities – mainly underweights gold, corn, WTI oil and soybeans, taking higher exposure to aluminium, gasoline and tin on the other hand.
Whilst underperforming the 60/40 benchmark by 0.2%, the tactical portfolio continue to outperform its strategic benchmark by 0.6% per year since 2004. The tactical portfolio has a lower volatility than the traditional balanced 60/40 portfolio, and the strategic benchmark, improving the Sharpe ratio by around 34% on average to 0.46 compared to 0.39 for the 60/40 and 0.31 for the strategic portfolio.

Tactical portfolio_April 2017
Overweight in black, underweight in red. Models for each asset class detailed in the individual notes using the following links: the equity-bond relative trade model for the allocation between equity and bond, the CAPE model for equities, the bond model for bonds and the contrarian model for commodities. Source: ETF Securities as of close of 31 March 2017
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