Events & Data Roundtable
ETF Stream Presents :
Managing strategic change and tactical concerns with ETFs
Myriad potential monetary policy and geopolitical outcomes paint an unclear picture for portfolios . How are ETFs being used to position nimbly across different time horizons ? Chair : Tom Eckett editor at ETF Stream
Fund selectors are currently navigating a Mexican stand-off with central banks as they look to balance the safety of market neutral positioning against sticking their heads above the parapet in search of short and long-term bright spots .
With central banks ’ interest rate pathways uncertain and renewed geopolitical risk , investors continue to hunt for allocations that allow them to spread their bets for a range of possible outcomes .
As a result , this roundtable , in partnership with Northern Trust Asset Management ’ s Flex- Shares ETFs , assessed how to allocate for different investment horizons , managing inflationary uncertainty and risks and opportunities across different geographic exposures .
Managing strategic and tactical risks
Wouter : On geopolitics , a deepening strategic rivalry between the US and China has made security tantamount to all dealings across technology , energy , supply chains and fiscal policy . As part of this , the search for energy security has furthered the green transition , however , this creates an economic headwind because of the insurance premium of replacing one form of energy with another . Overall , we are tactically cautious . We believe those forces which will constrain growth will be inflationary on a structural basis . We believe monetary policy will allow inflation to remain modestly above target .
Manish : Investing is all about time horizon . Despite what is said about US-China tensions , I see robust growth down the line , based on the view that the ‘ pie ’ is about to get bigger . The cost of capital in emerging markets is coming down in a big way , there will be greater competition and EMs will become more self-dependent , more focused on local currency and generate more internal growth . Francis : We are anchored by strategic asset allocation and not too influenced by shorter term effects . We are positioned cautiously but not at our maximum cautious level just yet . The recession theme is getting louder but we acknowledge the contrast in market conditions we have seen this year ; VIX has not hit above 30 this year but it did this six times in 2022 . We are also looking to do more work on government bonds . We do not think the inflation story is finished . There is lots of debate in the team on where inflation will land and we remain cautious on duration . Iain : We find the anchor in strategic allocation pretty healthy . When you do not have a strong signal about anything , with everything either a value or momentum trade , it is hard to pick a lane and the main thing is to remain disciplined . Markets will respond quite differently between a severe and mild recession . Outside of US large caps , many assets have been trading that this is a known challenge and many investors came into this year pretty cautious . Weixu : We keep strategic allocation as our
“ There is a lag effect of monetary policy but the impact from the lag is yet to be seen and is arguably not fully priced in . Reducing inflation is like wringing out wet clothes – most of it is easy , it is the last bit which is difficult to squeeze out ”
Francis Chua , Legal & General Investment Managers backbone . Our current tactical asset allocation is neutral and we are not falling into either strong recession or growth camps . High stock dispersion means we are implementing a value-growth barbell approach to prepare for soft or hard landing recessionary scenarios . We are also barbelled in fixed income , achieved by super long duration and short duration .
Asset allocating for inflationary uncertainty
Wouter : We are 6 % underweight developed market equity versus our high yield position so choosing to take our risk in credit rather than equity . We are also 3 % underweight emerging market equities countered by a 3 % overweight to natural resources , based on the demand-supply imbalance and geopolitical risks that have played out in recent months . Our underweight risk is based on the complacency that has crept in with growth and inflation . Inflation has come down faster than markets expected and inflation expectations have come down massively . Francis : There is a lag effect of monetary policy but the impact from the lag is yet to be seen and is arguably not fully priced in . Reducing inflation is like wringing out wet clothes – most of it is easy , it is the last bit which is difficult to squeeze out . We have a few items on the shopping list and are waiting for the right signal . We have trimmed our ‘ magnificent seven ’ allocation – there is a reason for them to still feature in portfolios but in smaller amounts , as part of a diversified equity portfolio . Manish : The lag effects of monetary policy are interesting and will play out . I am not in the “ inflationary ” or “ higher for longer ” camp . I do not believe inflation is a problem we will have to deal with in the medium to long term . PPI data in China , Germany is the worst since the data began and is telling us disinflation lies ahead . Weixu : Markets will overreact to any future monetary policy developments . The worst scenario for our portfolio would be good economic numbers – meaning central banks have more leeway to raise rates higher . There is this risk that the economy is strong enough to justify higher rates , which means when the recession finally hits , it is going to be much worse . Iain : Like a lot of others building portfolios for sterling-denominated clients , we try to build in as much diversification as possible in as efficient a way as possible . This is difficult given every dollar you move away from the S & P 500 has hurt your returns for a very long period of time .
Navigating China
Wouter : Strategically we have been worried about China as a long-term investment . The kind of political choices being made are corrosive to investor sentiment , foreign direct investment ( FDI )
42 ETF INSIDER | NOVEMBER 2023