Insights from the Chief Investment Office
Key messages from weekly roundup
Volatility underlines case for protection strategies.
U.S. stocks fell over 2% last week, but rallied sharply on Monday to begin this week. With uncertainty still high, investors need to make sure their portfolios are diversified. We recommend staying invested but incorporating portfolio protection through gold, TIPS, and hedge funds to insulate portfolios against equity market downside.
Improving portfolio yield amid low rates.
Fed chair Jerome Powell said that negative interest rates are not a policy tool under consideration. But while we agree that the Fed is unlikely to push U.S. interest rates into negative territory, what is clear is that rates are set to stay lower for longer. With rates set to stay lower for longer, investors need to re-assess cash and high-quality bond exposure, in favor of riskier assets like lower-quality credit.
Diversifying tech exposure.
The U.S. tech sector has shown relative immunity to the COVID-19 pandemic, with the index up 1.9% year-todate, versus a –12% return for the wider S&P 500 index. We think this relative outperformance suggests investors are “hiding” in the sector, and we have a cautious stance on US IT over the near term. This is in part due to the concentration in the returns: Apple and Microsoft now comprise around 42% of the sector’s market cap, and, without the two mega-caps, the IT sector would be down –5% year-to-date.
After strong performance in large-cap tech, we favor diversifying exposure toward longer-term themes such as digital transformation, the food revolution, and other trends accelerated by COVID-19.