Increasing Risk Exposure: Tactical Trading Decisions for January 2021
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 not only generates alpha, but also 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.
In the middle of December, surging COVID cases, a fast approaching Brexit deadline, and the Georgia election run-offs all contributed to greater market uncertainty, steering us toward risk reduction. Since then – although the policy implications of the Brexit deal and US Senate race are not yet fully understood – some sources of uncertainty have been removed from markets. Rising COVID cases and more contagious COVID variants are still concerning and may weigh on economic growth in the near term, but early indications suggest current vaccines are effective against these variants and should allow for more targeted and less economically stifling restrictions.
Additional mobility restrictions have been implemented across Europe and parts of the US, but we’re encouraged by the fact that economic impacts haven’t been as devastating as they were following measures introduced at the beginning of the pandemic. The continued rollout of vaccines, with three additional vaccines in phase 3 clinical trials, should help support economic activity, and recently passed fiscal stimulus will help cushion the slowdown. Further, the recent Democratic sweep in the United States brings with it hope for additional stimulus, which should provide a bridge until the economic recovery can become self-sustaining.
Against this backdrop, we have decided to increase our risk exposure in our multi-asset tactical portfolio, pivoting from the more cautious stance we took in mid-December. Overall, we continue to favor global equities and credit and have become more optimistic on broad commodities (see Figure 1). REITs and core bonds continue to look less attractive, and gold remains our preferred tactical hedge.