Georgina Taylor from Invesco Perpetual looks at how a multi-asset investment strategy might handle a developed market recovery.
This year, barometers of manufacturing in the US have moved back into expansionary territory and UK GDP growth has been steadily recovering. Elsewhere the picture has been mixed.
Growth in emerging markets has come under pressure and divergences in monetary policy are starting to emerge as some countries start to battle inflation and others remain concerned deflationary forces are still at large.
Volatility markets can also provide a great way to gain exposure to an investment theme
Developed market recovery has primarily been underpinned by a liquidity injection, in the form of quantitative easing. The vulnerability of asset prices to policy action was reflected very clearly when equity and bond prices became positively correlated in May this year, when the Federal Reserve made initial suggestions that they may taper quantitative easing.
This is where a multi-asset strategy can come into its own. It means having access to a broad investment universe and an unconstrained approach to sourcing investment ideas. This is the only way to achieve true diversification.
If developed world growth continues to recover, having exposure to equities will make a lot of sense and it is still worth having greater exposure to developed over emerging markets given divergences in growth and monetary policy. Multi-asset strategies can also build in some defences should monetary policy start to change. A portfolio can pinpoint exposure in interest rate markets, to build in a view that rates at the short end of the curve could rise, even if longer-dated bond yields remain anchored.
Volatility markets can also provide a great way to gain exposure to an investment theme that may have been running for a while in underlying markets. For example, emerging market equities have significantly underperformed developed markets this year but Asian volatility, reflected in the options market, has not really increased.
A multi-asset portfolio with an unconstrained research agenda, alongside robust risk management, has the flexibility to adapt to the changing nature of markets. A degree of flexibility to gain access to markets where the recovery has not yet been fully reflected in prices is key to performance.
Georgina Taylor is a product director, for multi-asset, at Invesco Perpetual
