Our Multi-Asset Views
Views have a 6−12 month horizon and are those of the authors and Wellington Management’s Investment Strategy Team. Views are as of September 2021, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase shares or other securities.
Commodities: Strong Fundamentals and a Unique Portfolio Role
We are bullish on commodities given the inflation dynamics discussed, as well as supply/demand imbalances across energy, metals, and agriculture. Capital expenditures have been very weak for the past decade following a free-spending period focused on growth rather than profitability. More structurally, environmental concerns are feeding into higher costs and potentially lower supply. Our research shows that commodities have historically been the only asset with a materially positive beta4 to inflation, so from a portfolio-construction standpoint, we see a case for at least some commodities exposure.
Low Rates, Tight Spreads: What to Do in Fixed Income?
We agree with market consensus that the Fed may likely begin tapering around year end. We see the European Central Bank (ECB) as more hawkish relative to the nominal growth picture in its economy, and we think sovereign rates in Europe are likely to drift upward. In credit, valuations are rich, with most spreads well inside of median levels. However, defaults are likely to stay very low, and demand technicals are strong as demographics and pensions generate huge demand for yield.
Within credit, we prefer EM debt to US high yield as EM spreads are considerably wider (FIGURE 3). Credit valuations have been a reliable indicator of forward excess returns—a dynamic we continue to trust. We think Mexico, Russia, and EM countries in Central and Eastern Europe are attractive. We also prefer bank loans, which offer attractive valuations vs. US high yield and could benefit from the Fed beginning to tighten.
We find securitized credit attractive relative to investment-grade corporates from a valuation and risk perspective, given the abundance of asset types. We continue to favor US residential housing, where millennials should be a growing tailwind for demand. Securitized credit also offers floating-rate structures, which are appealing from a duration5 perspective. The updated risk factors adopted by the National Association of Insurance Commissioners may increase demand for AAA- and AA-rated bonds.