Be prepared to play strategy out long term and through a slowdown
While many financial advisors may be shying away from the traditional 60-40 equity-bond portfolio in these challenging times, one portfolio manager is urging them not to throw it out but, instead, to adjust the formula for the short term and hold it for the long term.
“There’s no reason for you to panic at this moment,” Jason Zhang, a portfolio manager with SLGI Asset Management Inc., told Wealth Professional.
Zhang was sharing what SLGI is looking at for both the short- and medium-term outlook in a time of continuing uncertainty, high interest rates, and persistent inflation. He noted that SLGI has been analysing the market and feels that, even though the central banks moved rapidly to shore up the failing banks this past March, credit activity is starting to slow, which could lead to weak economic growth in the short- and medium-term. This adds more strain on top of the higher interest rates, which the banks started to introduce last March. So, he said SLGI is expecting the general economic situation to remain weak for awhile, probably into early next year.
SLGI has been watching investors react differently to equities and bonds for the last year and is expecting continued uncertainty, even as inflation falls, but he said it does not expect inflation to return to its previous 2% level as the banks had earlier hoped. While Zhang noted that the markets are not anticipating any more rate hikes from the central banks in the near future, SLGI expects that the banks also do not want to prematurely cut those rates. “We are prepared for this to play out,” said Zhang.
To deal with this situation, however, SLGI has positioned its equities in high-quality companies that are highly profitable with relatively stable earnings outlooks. It’s interested in companies that typically perform well and have relatively defensive stock even when the economy is challenged. Zhang noted it Is also interested in federal bonds, even if the 4% rate is at the short end of the curve.
“We think the upside room for bond yields to move higher is likely limited and we are positioned neutral in duration terms and looking for opportunities to add to duration as we move into a meaningful slowdown, if not outright recessionary environment, later this year,” he said.
“On a credit quality perspective, we are focusing on high-quality, investment-grade bonds as an area of overweight in our fixed-income allocation. We have maintained an underweight position in low-quality junk bonds as the current market pricing in these risky bonds has not provided enough compensation for investors bearing the risk of economic weakness in our forecast.
“On top of that, the defensiveness in our fixed income allocation corroborates with our preference on the equity side of high-quality, less cyclical areas of the stock markets and a modest underweight to equity versus fixed income from the stock/bond split perspective. We recognize the huge amount of uncertainty in the short-term, but we feel these defensive moves will help investors stay invested in the market to ride out the volatility.”
While noting that the volatility may continue for awhile and equity is not as great a bargain as previously, Zhang advised advisors to keep their longer-term investment horizon in mind.