GARS builds all-weather US strategy

Added 26th October 2016

The team behind Standard Life Investments’ Global Absolute Return Strategies (GARS) has taken a bullish position in US equities and the dollar, yet is diversifying its exposure to face three possible recovery scenarios.

GARS builds all-weather US strategy

Seeing some of its total 3% US equity allocation as “global proxies”, given the size and scale of the market allows the multi-asset macro investing team at SLI to take higher conviction exposure to the UK and Europe through specific strategies.

Further, SLI said given potential concerns over China, it was trading US dollar against the Korean won and Singaporean dollar.

“Both South Korea and Singapore are closely tied in with broader Asian trade and growth, and therefore any slowdown in economic activity in the region would likely manifest through their currencies,” a note from the team said.

With a defensive tilt, GARS was positioned to weather a number of different scenarios, including a quicker-than-expected recovery, a gradual recovery or an economic slowdown to the point of possible recession.

Accounting for over half the world’s equity market value, the dominance of the US and its stage in the cycle present the opportunity for pair trading with earlier-stage developed market recovery plays, such as Europe or Japan.

In an accelerated recovery scenario resulting in an interest rate hike, GARS expected its strategies with US interest rate exposure to perform well, as would those exposed to banks over consumer staples.

If recovery remains steady, it said high-yield credit would outperform.

The team said: “High-yield credit tends to thrive in a ‘Goldilocks’ not-too-hot, not-too-cold environment: there is neither a return to recession and the associated upward spike in default rates on loans to such companies; nor is there a pick-up in economic growth that would drive investors to seek the potentially higher returns of equities.

Finally, the GARS team said that if recession concerns picked up, large cap and technology companies would outperform smaller companies, the latter having around 90% of revenues from the domestic consumer.

SLI added its bullish dollar strategies would hold up even if the US fell into recession.

“A US recession would have major ramifications for global growth more widely and, in this environment, the dollar would likely benefit from its status as a relatively safe asset.”

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