Monthly Market Perspectives

Protecting Your Portfolio at its Core

02 February 2023 2:37 min read

Altaf Kassam, CFA

EMEA Head of Investment Strategy & Research

Altaf Kassam assesses the investment trends that have surfaced in the first weeks of 2023, offering his outlook on the potential benefits and difficulties that may come up as the year goes on.

Transcript

Speaker : Altaf Kassam

New Year's normally a time to look forwards. And when I think about what the investment themes I think are going to play out this year, top of my list is the resurgence of Value or the continued resurgence of Value. Value funds have had a great time towards the end of last year, handily outperforming surging Value indices. And we think this is going to continue this year as interest rates will still keep rising and real yields will keep going up as inflation falls. So, risk will be better priced, which is better for Value.

And if you think about where Value works best or where it is most represented, that is in Europe. So that fits with another theme from our GMO or Global Market Outlook, which talks about how we see the US dollar declining as the rates start to normalize and risk appetite returns. And that should also benefit equities outside the US.

So, when you put equities outside the US and Value together, then looking at Europe or eurozone Value, we think makes a lot of sense. But you do not have to just stick with Value. We have done a lot of work on how when you combine Value and Growth together, you get a nice smooth profile with a great Information Ratio. So, think about looking at Growth, but in an environment of rising rates, try and mix that Growth up with Quality. So more like a GARP or Growth at a reasonable price strategy. And you can put them together with Value and get a nicely diversified portfolio.

And talking about diversification, we do not think fixed income will have the same traditional diversifying property it has had in the past. Central banks haven't got the markets’ back anymore. So, you have got to think about different ways of protecting your portfolio. Do not get us wrong – we still think holding global Treasuries makes sense, especially with the way yields have risen. But on the equity side, instead of just thinking you can hold your normal equity portfolio and diversify with fixed income, you are going have to look to protect that equity portfolio by itself.

So, we are thinking something like defensive equities. Take that full fat equity exposure, make it a bit skinnier in terms of risk by using defensive equities and protect your portfolio at its core.

So those are some ideas for this year. As always, we will see how things pan out and come back to you. But with that, thank you very much.

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