Multi-Asset Solutions

Each month, the State Street Global Advisors Investment Solutions Group (ISG) meets to debate and ultimately determine a Tactical Asset Allocation (TAA) that can be used to help guide near-term investment decisions for client portfolios. By focusing on asset allocation, the ISG team seeks to exploit macro inefficiencies in the market, providing State Street clients with a tool that generates alpha that is distinct (i.e., uncorrelated) from stock picking and other traditional types of active management. Here we report on the team’s most recent TAA discussion.

Although some economic data points have started to miss consensus expectations and the spread of the Delta variant raises concern, the overall economic backdrop remains firm in our view and market-based risk metrics continue to point to a favorable environment for risk assets.

The post-pandemic recovery is not complete, but economies appear much improved and signs continue to point to accelerated growth over the second half of 2021. We maintain the view that the macroeconomic backdrop will provide a positive tailwind. Our quantitative models still favor equities and other growth assets such as commodities and our forecast for core bonds continues to improve as well.

Recent economic data points to a broadening of, and acceleration of, global growth led by developed markets. The biggest threat to strong near-term growth is likely on the supply side, where bottlenecks and labor shortages have kept inventories slim. But this is merely a delay, not a chink in the amor of an improving global economy. Overall, we continue to expect the macroeconomic backdrop to remain supportive.

Our longer-term asset class forecasts are forward-looking estimates of total return and risk premia, generated through a combined assessment of current valuation measures, economic growth, inflation prospects, ESG considerations, yield conditions as well as historical price patterns. We also include shorter-term return forecasts that incorporate output from our multi-factor tactical asset allocation models. Outlined below is the process we use to arrive at our return forecasts for the major asset classes.

Over the last decade, inflation has been subdued around the globe and struggled to come close to central bank targets despite loose monetary policy actions. However, influenced by the economic effects of the global pandemic, inflation appears poised to re-emerge in 2021 and to have an impact in the years to come.