Recent upheaval in the financial markets is creating new risks and opportunities, and investors should rethink their asset allocations to capture these trends, according to two market strategists.
Richard Bernstein, CEO and chief investment office at Richard Bernstein Advisors, said on Tuesday that we’re at the beginning of a major paradigm shift in the markets. As such, his firm has made major allocation changes in some of its funds.
“We’ve gone from being about 80% in the United States 10 to 12 years ago versus the benchmark being 40%, to now we’re about 50%-55% where the benchmark is 50%,” he said during a panel discussion at the Exchange ETF conference in Miami Beach.
“Our non-U.S. allocation has obviously gone up,” he continued. “Our cyclical allocation is also very high right now because in a rising rate environment you’ll have to have near-term earnings growth to offset the incremental negative of rising rates. Long-term stories do nothing for you in a rising interest rate environment. That’s how our portfolios are structured right now.”
Bernstein elaborated on his belief that long-duration assets aren’t the place to be.
“I think we’ve had a bubble going on in what commonly are called long-duration assets,” he explained. “That could be long-duration bonds or long-duration equities, which are high p/e equities. The bubble is going on because of the Fed’s quantitative easing where it bought Treasurys.”
He noted the Federal Reserve owns more than half of the 10- to 20-year Treasury market as part of its bond buying program aimed at lowering long-term interest rates in order to stimulate the economy during the Covid-fueled recession in 2020.
“By artificially depressing the 10-year they’ve artificially inflated the valuation of anything priced on the long end of the yield curve,” Bernstein said. “So any long-duration asset right now is overvalued.”
And he believes long-duration assets have been the core of many investor portfolios.
"The economy is changing, so shouldn't your portfolio change to mimic what's going on with the global economy?” he asked. “You can’t expect the old leadership to be the new leadership in a new type of economy.”