Asset Allocation Update: The ‘Break It All’ Portfolio

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When the markets undergo regime shifts, you need to abandon conventional investment methods. Adopt a common approach: investing in the economic cycle. Here, investors divide the cycle into four sections or quads – early cycle, mid, late, recession – then examine past relationships to choose the best assets for each.

Currently, most of these investors say we are in the fourth quad (recession) and recommend going long bonds, long gold, short (other) commodities and short equities. However, only the short position in equities has worked this year. The others failed: bonds are down 13%, gold down 7% and commodities up 25%. Some have even added real estate (REITs) to dampen inflation, but REITs are down 25% this year.

When the markets undergo regime shifts, you need to abandon conventional investment methods. Adopt a common approach: investing in the economic cycle. Here, investors divide the cycle into four sections or quads – early cycle, mid, late, recession – then examine past relationships to choose the best assets for each.

Currently, most of these investors say we are in the fourth quad (recession) and recommend going long bonds, long gold, short (other) commodities and short equities. However, only the short position in equities has worked this year. The others failed: bonds are down 13%, gold down 7% and commodities up 25%. Some have even added real estate (REITs) to dampen inflation, but REITs are down 25% this year.

Our approach was different. We have argued that we are entering a new regime driven by higher interest rates. This means that anything that has risen in a low interest rate environment will come under pressure – be it bonds, stocks, real estate or crypto. The only asset that we like to be the least fashionable for a long time – money.

Why switch to cash? On the one hand, you will keep your capital. Remember, the number one rule of investing is to “survive”. Second, as central banks raise rates, cash will start earning you profits.

Finally, look at the performance of cash over the decades. It generated returns in excess of 100% during the 1970s and 1980s, but has steadily declined to single-digit returns over the past decade. With recent returns this low, you can be sure investors are underweight cash, as they have found other ways to earn returns.

Thus, we like to go long what others are underweight, namely cash, and stay short on what others are overweight, namely bonds and equities. This is the ‘everything breaks’ wallet.

Elsewhere, we are neutral on both commodities and crypto. Within the equity sectors, we like to be overweight energy, large cap value, traditional infrastructure, clean energy and healthcare. We would be underweight homebuilders, large cap growth, consumer discretionary and staples, and technology.

Bilal Hafeez is the CEO and Editor-in-Chief of Macro Hive. He spent over twenty years doing research at major banks – JPMorgan, Deutsche Bank and Nomura, where he held various “global head” positions and researched currencies, rates and cross-markets.

(The commentary in the above article does not constitute an offer or solicitation, or a recommendation to implement or liquidate any investment or to engage in any other transaction. It should not be relied upon as the basis for any decision investment or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)

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