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.
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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