Of course, the GFC selloff stemmed from the massive collapse of an overstretched financial system, which took a very long time to repair. This time around, large swaths of the global economy were effectively switched off in efforts to increase social distancing and flatten the curve of the virus.
Before that shutdown, the economy had been posting solid growth. “Erasing” multiple quarters of growth no doubt creates a deep wound, but it’s our view that if public-health, monetary and fiscal policy efforts are effective, growth will ultimately rebound more quickly this time.
Balancing Current and Forward-Looking Signals
Financial markets are likely to be looking ahead—not at the current state—as they assess the potential for a recovery. But the current state is highly volatile. So, multi-asset strategies must calibrate their exposures dynamically to address both perspectives when calibrating risk-asset exposure.
We think it’s important to integrate many signals, but you could sum up the current situation this way: our bearish signals are flashing red—understandable, given so much volatility and uncertainty. But we’re seeing green flashes from our fundamental signals, which include not only valuations but inputs like quality, stimulus and inflation.
Underweight Risk—But Be Ready to Adapt Quickly
Given our view that markets will ultimately recover—but at an unknown pace—we think it makes sense to meaningfully underweight risk assets—including stocks. This is to acknowledge higher volatility as everyone seeks more clarity on the impact of COVID-19 headwinds, policy responses and the breakdown in OPEC negotiations.
But that positioning must be highly dynamic, because the selloff and recovery won’t happen in a straight line—as we’ve seen very recently. Recent policy actions to flatten the COVID-19 curve, bolster liquidity and stabilize markets were encouraging, arguing for a slightly reduced equity underweight. When markets reacted perhaps a bit too enthusiastically to this policy progress, it would suggest taking a little more risk off the table.
These day-to-day swings make it abundantly clear that multi-asset investors must adapt their positioning nimbly as signals change—striking the right balance between risk and opportunity. There’s risk in volatile—and sometimes punishing—markets. But there’s also risk in being caught with too little exposure to opportunity as markets rebound. Markets are dynamic—and multi-asset positioning has to be dynamic, too.