Key takeaways
While we are cautious on risk assets such as equities in our near-term tactical outlook, equities have demonstrated attractive returns when looking through to the longer-term strategic and financial planning time horizon.
- We lead with planning. As most investment portfolios are likely to be invested based on that longer-term strategic and financial planning time horizon, it is important to bear those long-term results in mind, especially in the context of the challenged tactical environment.
- IAG’s asset allocation framework includes strategic asset allocation, which is focused on the long term and serves as the anchor, and tactical asset allocation which adds a near-term overlay, seeking to add value and help smooth out short-term market swings.
- When we zoom out from the near-term cautious tactical views to the strategic time horizon, which is more in line with financial plans, equities and bonds remain attractive.
Long-term context
Given our view of elevated recession risks this year, we have been cautious on risk assets, especially considering the behavior of the equity markets around recessions. A weak macro environment tends to be a headwind for equities, and our work shows that stocks have declined by 29% on average (24% median decline) around recessions. Thus, we remain defensive currently on a tactical asset allocation basis.
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