Asset Class

Tactical (1-3m)

Cyclical (6-12m)

Structural (2-3y+)

Portfolio Positioning

Equity

Tactically Neutral: Tactical Outlook Model now neutral (chart). In theory, we are still not fully out of the woods from VP’s Correction Signal Trigger, which usually flags a 30-60 day period of risk-off behavior across markets. In practice, Powell had every chance at the last Fed meeting to act hawkish and he refused them all. This likely means the risk-off behavior will be a lot more mixed now, rather than the broad based behavior the signal originally picked up (chart) (report).

Relative Value: Chinese equities are starting to break out to the upside (chart)(chart)(report).

Cyclically Neutral: Our US growth LEIs continue to improve (report) (chart). The cyclical (6-12m fwd) outlook for corporate earnings has been surprisingly resilient, defying our previous expectations that rising wage costs would pressure profit margins. Earnings outlooks have stabilized (chart), while US corporates are starting to show more pricing power (chart) (report).

S&P 500 valuations are rich, but not at nosebleed levels (chart). Buyback spending remains elevated, but the index’s current cash return is below both the long-term average of 80% and the post-GFC average of 90% (report).

Relative Value: The covid-distorted inventory cycle is normalizing, shown by the closing of the ISM customer vs manufacturer inventory gap. Given the YTD rally in the S&P 500 and semis, there is already a lot of good news discounted. We prefer to play the inventory cycle by being more surgical in our long equity expressions. Our top down process flags 1) electronic equipment, instruments & components 2) household durables 3) building products and 4) distributors (report).

Relative Value Regions: European chemicals are less crowded and capital-scarce, making the sector a good way to get exposure to the European recovery (report) (chart) (chart)

LatAm remains our favorite long EM expression. Brazilian equities have been notable laggards YTD, and are capital scarce with cheap valuations (chart)(report)(report).

Structurally Bullish: Age of Scarcity means reversal of cheap credit, cheap labor and cheap commodities. Equities to weather era of higher inflation better than bonds (report).

Relative Value Regions: Capital cycle favors: Mexico, Brazil (excluding financials), Malaysia, Indonesia (chart)

Relative Value Sectors: Capital cycle favors: transportation, homebuilders, tobacco, energy (chart). Electronic equipment, instruments and components dominate the US single stock screen on capital cycle and crowding and is set to be a beneficiary of the mega-trends in automation, IoT and EVs (report).

Mexico (transportation), Brazil (energy, agriculture, personal care), European chemicals (report)

Avoid: Financials (report), US insurance, software, packaging, and banks (chart).

Framework: Our 3-step roadmap to get aggressive on equities includes: 1) policymaker panic (e.g. Fed easing), 2) selling capitulation signals, 3) recession signal off & leading indicators turn up.

Macro: The past 12-18 months have seen a somewhat unique environment of consistently contradictory US macro data. The labor market and consumer have been resilient alongside local recessions in manufacturing, housing, China and Europe. This environment is now resolving with an unambiguous improvement across US growth LEIs.

We think this unique environment stems from a) fiscal and b) labor hoarding. For now, these factors are persisting while covid distortions are ending, an indication the rebound in US growth leading indicators is credible.

US large cap equities have correctly anticipated the strong US growth environment; S&P 500 fair value is neutral, but there is room for buybacks to pick up + growth outlook is credible. Focus on relative value opportunities.

Core allocation (focus on capital-scarcity): energy, homebuilders, goldminers, LatAm (Brazil & Mexico), European chemicals

Fixed Income

Tactically Neutral: Net active buy signals on Global 10y bonds now neutral (chart). US 10y tactical outlook neutral (chart). There is an even split between hiking, neutral, and easing policy regimes across global central banks (chart). Our Fed easing model recently flipped off, indicating today's economic backdrop is not historically associated with rate cuts (chart).

Relative Value: short SONIA vs SOFR (report)(video)

Cyclically Neutral to Bullish (yields lower): Yields are starting to rise above our “fair value” estimates (chart), while term premium is likely biased lower (chart).

Given the YTD outperformance of equities vs bonds (and over the past 3 years), we think it is better to err on the side of bonds potentially experiencing a cyclical rally. We also think we are currently experiencing a “mini” inflation scare that should peter out through 2Q (report).

Relative Value: MBS still offers the best value; rate volatility and yields are biased lower, and inflation is likely range bound (report). IG only yields 5% while newly issued MBS yielding 6% (report) (report) (video). Bullish TIPS (real yields) (report) (report). Long Australian bonds via flatteners due to the relatively clean economic and policy outlook flatteners (report)(video).

Structurally Bearish (yields higher): Financial repression risks, e.g. higher inflation + yield capping (analogy to Fed-Treasury Accord period), make nominal bonds unattractive (report). The Age of Scarcity means reversal of cheap credit, cheap labor and cheap commodities.

Demographic trends (more “capital consumers” (young, old) vs less “capital providers” (middle-age) mean higher yields are needed to clear the market for capital (savings).

Macro: The recent Fed meeting was widely interpreted to be dovish. The bar to hike is high and Powell has threaded the needle again by talking tough on inflation, while also giving implicit re-assurance he is focused on growth downside risks. (report).

Core allocation: we see attractive value in TIPS and MBS. Real yields are still mispriced in the current environment (report), and have surged above post-GFC highs (chart). MBS continues to offer attractive pick up in spread.

Duration outlook: we are cyclically bullish duration (term premium risk priced in, govt. cap on real yields), specifically via agency MBS and TIPS. However, structurally, duration upside is limited in a high inflation recession, so need to aggressively rotate out of bonds after recession hits due to the coming “Age of Scarcity”.

Tactically Bearish USD: Tactically outlook still positive (chart), but breadth is weak (chart). Our YTD cyclical long USD bias has worked out nicely so far, but there are now increasing signs that the rally is getting a bit stretched. The Citi FX Pain indices (chart) are proxies for positioning and show contrarian long USD positions now (report).

Relative Value: Long EURUSD (report). Avoid MXN as election nears (report).

Cyclically Neutral: The diffusion of our FX edge models still retains a medium-term bullish USD bias for now (chart), but in terms of tactical risk-reward it makes more sense to look for short USD trades, with the EUR being the obvious candidate given our LEI (chart) and FX edge models (chart).

Relative Value: Long EURUSD (chart), Long EURCHF (report), short CNH (report).

Structurally Bullish on USD: Our refreshed cyclical / structural FX framework points to a bullish USD outlook (report).

Relative Value: Capital cycle & re-shoring trends + capex / commodity supercycle = bullish LatAm (in particular MXN).

Framework: Carry and valuations are key FX drivers; however, by including the capital cycle, current account, fiscal policy, and credit growth, our FX edge models are able to offset the shortcomings of carry and valuations alone (whitepaper).

Core allocation: long USD, long LatAm FX (BRL, MXN post-election)

Commodities

Tactically Neutral to Bearish: Tactical outlook now neutral on (chart). Net aggregate sell signals now negative (chart).

Gold: Tactical signals suggest rally is stretched (report)(chart). Fast money is elevated (chart).

Relative Value: Trim spot gold, Avoid adding to Goldminer despite there relative underperformance (chart). Take profits in US Energy (chart)(chart).

Cyclically Bullish: An anaemic supply response to growing global demand remains the key story for energy and industrial metals. Our commodity supply-demand model has flipped positive (chart), and more than 60% of our growth leading data inputs (90 series in total) are now improving QoQ (chart). These are all bullish cyclical signs for commodity prices.

Relative Value: Gold’s recent rally has been met with improving breadth (chart). This differs from 2023 and indicates fiat debasement worries are contributing to higher gold prices.

The US strategic petroleum reserve continues to be quietly refilled, acting as a support for oil prices. Oil rig counts have trended lowers since 2023, while the number of drilled but uncompleted (DUC) wells has continued to fall to new lows (chart) (report).

Structurally Bullish: Fears over the US fiscal trajectory are understandable, but the path of least resistance is likely to be financial repression and central bank intervention, which ties into our structural preference for real assets (report). Age of Scarcity means reversal of cheap credit, cheap labor and cheap commodities. Commodity supercycle in tact.

One of our favorite structural anchors for gold fair value is the ratio of the total amount of G20 broad money supply (M2) to above ground gold stocks (chart). The stock of gold above ground only grows very slowly, at about 1-2% YoY. More debt issuance and more deficits will fuel growth in money supply, which is likely to create greater depreciation pressures for fiat currencies.

Relative Value: Gold, oil, copper, natural gas etc. are all structural real asset winners in the Age of Scarcity.

Capital scarcity favors goldminers, oil & gas (report)

Macro: The cyclical and structural outlook has not changed for real assets, which remain our highest conviction and largest overweight. Tactically, things have become stretched, creating an opportunity to trim and take profits.

Recovering global growth cycle is cyclically supportive of commodities (chart). Long-term supply indicators are increasingly aligned for a bullish structural setup in energy and copper.

Gold miners remain capital scarce and uncrowded. We view goldminers as the best way to participate in an attractive structural backdrop for gold.

Credit

Tactically Neutral: Tactical signal is neutral on IG (chart) and high yield (chart).

Relative value: USD and EUR IG spread widening via LPPL crash climax (chart)(chart)

Cyclically Neutral to Bearish: Credit spreads remain complacent, pricing in a soft landing as investors reach for yield (chart). Lending standards are improving, but still suggest downside pressures on loan growth (chart).

Relative Value: Higher spreads vs low forward earnings yields are signs of HY offering more relative value, favoring energy and utilities (chart).

Relative Value: Linked to Age of Scarcity, we think duration will underperform in the next cycle with higher inflation (IG vulnerable). Select HY credit linked to capital-scarce industries should perform well (e.g. energy, telcos).

Core allocation: IG over HY over Leveraged Loans.

Asset Allocation