SPDR® SSGA Global Allocation ETF (GAL) – Q2 2021 Commentary

During the second quarter of 2021, SPDR SSGA Global Allocation ETF (GAL) finished up in absolute returns and outperformed its custom strategic benchmark. The fund finished the quarter with an overweight to equities and commodities while favoring US long bonds, both investment grade and Treasuries, within fixed income.

Directionally, our preference for growth assets, both equities and commodities, and our corresponding underweight to aggregate bonds supported relative performance. Relative value positioning within fixed income aided performance, but positioning within equities dented relative returns. Supported by strong long-term price momentum and earnings sentiment, we maintained our sizable overweight to equities (funded from bonds) throughout the quarter. Even though bonds delivered respectable returns, equities continued to outperform as investors increased their risk appetite given broadening and acceleration in global growth led by developed markets. Our stable overweight to commodities, underpinned by firm momentum and favorable curve dynamics, helped to deliver alpha as oil prices moved steadily higher while other commodities exhibited mixed performance. Elsewhere, allocations to long bonds, both investment grade credit and Treasuries, buoyed performance. On the negative side, an underweight to real estate investment trusts (REITs) hurt relative performance. We held a meaningful underweight to REITs as our model disliked the asset class. However, REITs continued to perform well as economies reopened and investors received more clarity on REIT cash flows. Gold rallied for most of the second quarter, but retreated in June on the back of a more hawkish Fed. Our allocations to gold detracted over the period but did not offset the value add from broad commodity allocations.

Fund Performance

Portfolio Allocations

Portfolio Positioning and Outlook
While we continue to see a constructive outlook in many markets, it is also important that we not overlook the more specific risks that are present in order to inform our risk management and portfolio positioning. On that note, inflationary risks stand out as the most obvious pitfall to protracted progress in the months ahead. For the most part, our quantitative evaluation of markets today continues to promote a healthy outlook for many growth-oriented asset classes, such as equities and commodities, and even for some pockets of the bond markets as well. Sentiment may be a bit extreme and argue for less than full risk budgets, but on balance it appears that markets can continue to push higher as economies continue to reopen from the pandemic.

Our near term outlook continues to favor equities over most other broad asset classes and we remain overweight. Our risk indicator contributes to this view but our bottom-up modeling also favors stocks as momentum trends remain firm and expectations surrounding top line sales growth and earnings remain robust.

From a regional perspective, emerging markets sport relatively robust inflation betas and we do hold an overweight allocation. Firm Purchasing Managers Indexes (PMIs), improving trade data and a rebound in cyclical sector revenues lend support to our outlook for emerging markets. Across developed markets, we prefer US and European equities and we maintain an underweight to the Pacific region. US equities have remained resilient, notwithstanding some potentially underappreciated tax risks as has been noted. European stocks look good from a valuation perspective, but we’ve also seen improving sentiment and short-term momentum. Ongoing lockdowns in Japan have weighed on activity in the region and this has shown up in depressed sentiment and momentum factors within our models — and an underweight allocation in our portfolios.

While we are net underweight fixed income in our portfolios, we favor longer duration corporate and Treasury bonds — a capital efficient way to target duration in multi asset portfolios. And with interest rates comparatively depressed in other developed markets, as well as firm demand from pensions and international investors, we think the relative stability exhibited by the long end of the curve can continue in the near term.

We also remain overweight to commodities, which is one of the most effective ways to protect against rising inflation. This should not be terribly surprising since many commodities are, at some level, the base ingredients for more complex and hedonically adjusted price indexes. In this respect, our short-term views do align with a meaningful stake in raw commodities. Our view is partly informed by the baseline inflation risks but also draws upon strength in momentum indicators as well as favorable near-term curve dynamics. While we can’t fervently commit to an unambiguous upswing in inflation, we do see more prominent risks to the upside than we have for some time.

Market Regime Forecasts
The Market Regime Indicator (MRI) employs a quantitative framework and forward-looking market indicators, including equity- and currency-implied volatility, as well as credit spreads, to identify the current market risk environment. Tracking risk appetite shifts in the market cycle helps frame tactical asset allocation and volatility targets.

A Look at the MRI