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Investment Newsletter 4Q18

Your Investments:
Update on Asset Allocation: U-S-A, U-S-A
Stuart P. Quint III, CFA
Managing Director, Investments and Compliance

 

October 3, 2018

Dear Ambassador Family:

 

In August, we made some tweaks to many of your portfolios.  The net result is that they have become a little more defensively relative to the start of this year.  Here are three major themes:

  1. More Cautious on Global Growth

    We have drastically reduced positions related to global growth (commodities, emerging markets) and reduced Japan in portfolios.  We have grown more cautious on global growth in recent months.  Economic data from Europe and China has peaked.  Emerging market currency volatility is reemerging.  Lower global growth also puts commodity demand growth at risk.

    While the fundamentals of many Japanese companies still remain attractive, the fact is that China is Japan’s number one export destination.  Japan will not escape international volatility, though it can outperform it.  As an offset, the Japanese Yen often strengthens in times of global volatility as a safe haven, given that Japan is still a net lender to the rest of the world.  Our active manager invests in companies more geared toward domestic economic activity as well.  We keep the active manager, but reduce exposure to reflect a deteriorating situation overall for international markets.

  2. Play More Defense by Raising US Exposure

    We have reinvested into low beta areas of the US such as US REITs and fixed income. REITs consist of commercial property mainly in the US.  Rises in construction (material and labor) costs could restrict further supply growth.  Continued growth in US jobs helps demand for real estate.  Yields around 3% with moderate growth are reasonably attractive.

    While we are still cautious on much of traditional fixed income, we have narrowed our underweight position as a form of insurance against macroeconomic risk.  Macroeconomic risk potentially could arise from an upset either in Europe (weak growth, rising populism), China (weakening economic growth, fallout from US tariffs), or other emerging markets.

  3. Conclusion: A Little More Caution, But Not Bearish

    Let us be clear that we do not foresee a major bear market around the corner.  Rather, we are acknowledging that the bull market is “long in the tooth”.  Risks have risen, particularly overseas.  (Let us also not forget US mid-term Congressional elections, which might provide some future noise with a change in control of at least one house of Congress.)  On the other hand, the US economy shows no signs of weakening, and corporate profits continue to impress in aggregate.  Hence, we stick with a cautiously optimistic bent, albeit a little more cautious compared to the start of the year.

 

Please let us know of any questions.  You can also find a lot of information on a variety of investment topics on our website.  Learn our thoughts on various types of investments as well as psychology (a major factor for building and maintaining successful financial health).  You can also find past investment newsletters in the Investment Management folder of our Resource page.

 

Sincerely,

 

Stuart P. Quint, CFA

Managing Director, Investments and Compliance

 

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