Multi-Asset portfolio outlook, positioning, and attribution as of 03/31/2023

March 31, 2023

Outlook

• We see continued risk of slowing economic activity tied, in part, to the Fed’s aggressive monetary tightening, and elevated stress in the U.S. financial system resulting, in part, from aggressive monetary policy has exacerbated the late-cycle challenges to growth.
• While headline data for some areas of the global economy remain sound, such as the U.S. employment and consumption, leading areas of the job market and reduced consumer savings suggest to us that the full impact of the Fed’s rate hiking cycle has yet to be felt.
• In this evolving environment, we see significant risk to corporate earnings for the most economically sensitive parts of the markets.
• We expect earnings growth to vary significantly across U.S. sectors in 2023, as is typical when risk of recession is elevated, and we believe sector allocation will be key to investment outcomes in the coming quarters.
• Internationally, as global economic growth slows, we believe Europe still faces significant risks from monetary and fiscal tightening with a lower savings cushion to support consumers, and we expect slowing growth to present headwinds for economically cyclical emerging markets, while we see developed Asia as a relative bright spot.
• While risks to equities have increased, risks to fixed income have diminished, in our view, following the sharp rise in interest rates last year, as slowing economic growth and a likely easing of inflation should reduce upward pressure on intermediate and longer-term interest rates, and a Fed-induced slowdown could ultimately push down longer-term interest rates.

Portfolio Positioning

• Economic risks continued to rise, in our view, and we have further reduced economic sensitivity by reducing equity exposure and exiting broad commodities, while adding to fixed income, as fixed income and gold presented upside potential, in our view, due to the rise in real yields over the course of 2022.
• Within equities, we are avoiding early-phase cyclical U.S. sectors and, instead, are emphasizing sectors that we expect will see less earnings deceleration and margin compression as economic growth slows, and we have continued to add to late-phase, defensive U.S. sector exposures, with overweights of Health Care, Consumer Staples, and Utilities.
• We remain underweight to international equities, and particularly Europe and emerging markets, but we maintain an overweight of developed Asia, where we see potential resilience.
• Within fixed income, we are emphasizing longer-term securities that should benefit from declining long-term interest rates, and we have increased Treasury exposure over the past year, which we believe could benefit amid a flight to perceived safe assets.

Q1 Attribution