Multi-Asset Insights
Key Highlights
- The soft landing being priced by markets is certainly not guaranteed. Accordingly, we think that protecting against risks should move up the priority ladder, but in a manner that does not preclude growth opportunities
- Following the strong run by US megacaps, idiosyncratic risks in market cap-weighted equity indices have grown, posing challenges to asset allocators
- Inability to place the same level of confidence on negative stock/bond correlations as in the 2010s poses separate challenges, with results from supplemental means of diversification such as trend-following strategies warranting attention
Should US equity market concentration be a concern?
As measured by the Herfindahl-Hirschmann Index, the US is currently an outlier in terms of equity market concentration, relative to other core markets and its own history. This is especially impactful to portfolios, given that US stocks now account for over 40 per cent of global market capitalisation. High concentration alongside high correlations between the top names within US equities has led to increasing idiosyncratic risks in market cap-weighted indices. However, opportunities to tilt US equity exposures must be assessed against the macro and market backdrop.
Trend following could be back in fashion
Trend following is an investment strategy that has historically achieved strong performance in both up and down markets, while exhibiting low correlation with traditional assets on average. Double-digit returns in 2022 and positive performance amidst the current bull market are affirming the strategy’s usefulness once again. This is particularly pertinent given the challenges positive stock/bond correlations have posed to portfolio diversification. Trend-following strategies are simple and rely on algorithmic rules that are usually determined after the event and can be easily coded. However, many parameters come into play and there is need for strong focus on balancing reactivity and unnecessary turnover.