Asset allocation view

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As we start 2019, it is clear that investors will have to think differently about positioning than they have in recent years. The era of market beta driving returns is now firmly behind us, and the volatility that kicked off the final quarter of 2018 has not dissipated. We believe this is likely to continue, especially as the usually tranquil festive period was hit with uncharacteristically wild swings in the market: Christmas Eve was the worst in recorded history for stock markets, followed by the largest move in percentage terms for stocks since 2009 two days later. But with heightened volatility comes opportunity for active investors, and we believe it makes sense to put some risk back on the table. While last month our overall position was neutral across the board, we have now moved to overweight positions in both equities and fixed income, while moving underweight cash. Our team believes that now may be the time to take advantage of the dislocations in markets created by heightened volatility. In equities, there is the possibility of a last leg in the bull market, but given the significant disparities in global equity regions, we are being highly selective in spending our risk budget. One key move is our overweight in emerging market equities, as we believe there is an attractive entry point on a valuation basis, and headwinds such as USD strength and a high oil price appear to be fading. Balanced with this incrementally higher risk-on stance, we are also increasing our allocation to fixed income. Again, we are being selective in our exposures as central banks continue a path to normalisation, but believe this move has limited downsides as well-anchored inflation is compounded by low oil prices. We have also moved underweight cash, which is driven by our view that a fixed income/equities barbell is a more judicious approach than allocating to cash in case inflation does rear its head. While we aren’t taking a broad-based risk-on posture, we are adding to risk where we see compelling risk-reward opportunities. As ever, our focus will be on preserving capital while taking advantage of the opportunities that present themselves in these uncertain times