26.03.2021 - For almost a year now, the seemingly endless support of the central banks, as well as one fiscal package after another, has fuelled an equity market boom that is unparalleled by historical standards. Currently, it seems as though everyone is talking about a persistent reflationary environment. What is the effect on the portfolio construction of a multi-asset fund?
Reflation is broadly defined as the initial phase of an economic recovery after a period of contraction. After the 2020 pandemic, the unprecedented policy support measures enacted by the monetary and fiscal authorities, along with the progressive roll-out of Covid-19 vaccines, have established the pre-conditions for global economic reflation. Such an environment is considered positive for risk assets. First and foremost, the US will benefit from the combination of fiscal and monetary policy. However, rising commodity prices and increased import demand should also benefit emerging markets overall.
In anticipation of a continuing economic recovery, interest rates are rising steadily, but only slightly, without putting a strain on equity prices, which are also continuing to increase. We are seeing a rise in interest rates almost everywhere. However, in the eurozone, this has slowed somewhat as, on the one hand, we are seeing slightly lower growth there and, on the other hand, interest rates must continue to be kept low due to the high public debt of some member states. This primarily concerns the long end of the yield curve, which should at least reach pre-crisis levels, as has already happened in many cases.
As active Portfolio Managers, we already adjusted the positioning of our multi-asset fund, the Ethna-Aktiv, accordingly over the course of last year. At first glance - particularly considering that the resulting trends have been dominant for a while - the necessary asset allocation seems to be clear:
- Equities are given preference over bonds, cyclical companies, small caps and emerging market stocks are the outperformers. Experience shows that this type of environment favours financial and energy stocks. However, value stocks that have been underperforming for some time will also do better during this period.
- Commodity prices also continue to rise. All types of industrial metals and energy sources should benefit from this development. After a consolidation of the already significant prices increases of the last 12 months, their price rise should continue.
- Everything is accompanied by a generally weak US dollar.
Just a year ago, however, right before the pandemic, the optimal asset allocation was different. We were in the ‘late autumn’ of an economic cycle whose end couldn’t really be predicted. Accordingly, a moderate to slightly overweighted positioning in equities and a high interest rate sensitivity in a bond portfolio that was much larger than today was then considered the optimal allocation. In comparison, the current portfolio composition represents quite a turning point. The changes in the market environment have necessitated a number of allocation adjustments. Even for this relatively short investment period, it is clear that simply being able to invest in different asset classes is no guarantee of a balanced portfolio, but merely a basic prerequisite. In order to be successful in the long term, we believe that the flexible adjustment of investment decisions to a changing macroeconomic environment is essential.