SPDR® SSGA Income Allocation ETF (INKM) – Q1 2021 Commentary
During the first quarter of 2021, INKM finished up in absolute returns and outperformed its custom strategic benchmark. The fund finished the quarter with a sizable overweight to US equities and a modest allocation to long credit bonds.
Performance Directionally, our overweight to equities and corresponding underweight to bonds aided relative performance. Relative value positioning within fixed income was also positive, but an underweight to real estate investment trusts (REITs) dented relative returns. The overweight positioning to equities during the quarter added value. Despite bouts of volatility, equity returns were positive and outperformed bonds. The ramp up of vaccine distributions, record fiscal stimulus and better COVID-19 trends offset inflation concerns as the reflation trade continued, pushing equities higher. Elsewhere, our preference for long investment-grade credit and high-yield bonds at the expense of long Treasury bonds was beneficial. High yield provided positive absolute returns and benefited from the supportive risk-on sentiment. Long credit bonds finished down as inflation concerns pushed yields higher, but credit outperformed Treasuries, which finished down over 13%. On the negative side, an underweight to REITs hurt performance during Q1. The pro-cyclical rally, which saw re-opening plays outperform pandemic winners, propelled REITs higher and our sizable underweight negatively impacted performance.
Portfolio Positioning and Outlook There are certainly pockets of equity markets that look frothy, some of which have cooled off during the back half of the first quarter. But from a high level perspective, the market internals of late appear to reflect more robust growth and optimism surrounding economic reopening. Our quantitative models continue to prefer equities as strong sentiment with respect to both earnings and sales expectations, coupled with positive momentum factors, outweigh stretched valuations and softening quality scores. Regionally, the US remains our favored region due to strong price momentum, positive macro scores and robust earnings and sales estimates, which offset unfavorable valuations. Our forecast for Europe has deteriorated as feeble price momentum, conjoined with weak sales and earnings expectations offset positive valuation metrics. Pacific equities also look attractive as positive sentiment, coupled with still attractive valuations, buoyed our outlook.
At the moment we continue to see some additional upward pressure for interest rates in most developed markets. Our views are influenced by improving economic data and also take into account possible over-reactions to prevailing and upcoming inflation prints. Risks of inflation appear to be more tangible than they have been for quite some time, at least from an intermediate horizon or secular perspective. Our positive outlook for credit is driven in part by our models, which forecasted a steeper yield curve, implying positive future economic conditions and tighter credit spreads. Further, despite relatively tight spreads (much like valuations for most assets), the credit environment still looked attractive against a better economic backdrop.
Brighter prospects of economic reopening and supportive risk appetite bode well for the REITs outlook, but this view could be upended by a flareup in COVID-19 cases or disruptions in vaccine rollouts. Additionally, short-term price momentum is positive, but this offset by weak earnings and sales sentiment that hasn’t recovered since mobility restrictions cratered demand in 2020. Overall, our forecast for REITs is rather somber and we prefer to take risk within equities.
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
Real Estate Investment Trust (REIT) Companies that own and operate commercial properties, such as office buildings and apartment complexes.
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