Invesco has said August marked a turning point for financial markets with a changing of the guard in the key drivers.
In its latest tactical asset allocation update, the asset manager said last month a shift from inflation and artificial intelligence to growth and employment as primary drivers of market performance.
To coincide with that, the firm has maintained defensive portfolio positioning with an overweight to fixed income versus equities, and a preference for defensive factors in equities and high quality in fixed income.
Alessio de Longis, head of investments, Invesco Solutions, explained that global risk appetite continues to decelerate, signalling a potential downshift in growth expectations.
He said the firm maintains a defensive asset allocation relative to the benchmark, overweighting fixed income relative to equities, favouring US equities and defensive sectors with quality and low volatility characteristics. In fixed income, it remains overweight duration and underweight credit risk.
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De Longis added that within equities, the firm is overweight quality and low volatility characteristics, tilting towards larger capitalisations at the expense of value, mid and small caps.
In terms of defensive sectors to target, Invesco pointed to healthcare, staples, utilities, and technology. Cyclical sectors to move away from include financials, industrials, materials, and energy.
The overweight to US equities relative to other developed markets and emerging markets is a reflection of declining global risk appetite and stronger US earnings revisions versus the rest of the world.
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Invesco added the outlook for the US dollar is still favourable due to negative surprises in global growth and tighter monetary policy relative to the rest of the world.
Turning to the specifics of the fixed income positioning, the asset manager is underweight credit risk and overweight duration, favouring investment grade and sovereign fixed income relative to high yield.
De Longis noted that while the current backdrop does not suggest a major risk for credit spreads, downward revisions to growth expectations are likely to be accompanied by marginally wider spreads from cycle lows and lower bond yields, favouring higher quality and higher duration assets. Invesco therefore favours nominal bonds over inflation-protected securities as inflationary pressures continue to decline.
