Invesco said it is maintaining defensive positioning across its portfolios in its latest tactical asset allocation update.
The firm is overweight fixed income versus equities and still favours US equities over developed ex-US and emerging markets, as well as defensive equity factors. It added that its framework “remains in a contraction regime”.
Within the equities allocations, its teams are tilting towards larger capitalisations at the expense of value, mid and small caps. They expect a combination of quality and low volatility characteristics to outperform and provide downside risk mitigation in a scenario of falling growth expectations, falling bond yields, and weaker equities markets.
Favoured defensive sectors include healthcare, staples, utilities, and technology at the expense of cyclical sectors such as financials, industrials, materials, and energy.
The main driver of this cautious positioning is the persistence of above target inflation in the US, which has seen the Federal Reserve scale back its rate cut plans for 2025.
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“The December FOMC meeting delivered a significant shift in strategy by the Fed compared to the communication at Jackson Hole in August, with renewed focus and concern on inflation,” Alessio de Longis, head of investments, Invesco Solutions, said in the report. “Equity and bond market sensitivity to economic data is likely to increase in 2025.”
In fixed income, Invesco is underweighting credit risk and overweighting duration. The firm favours investment grade and sovereign fixed income relative to high yield.
“Credit spreads tightened further over the past month, clearly signalling resilience in credit markets,” de Longis said. “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.”
On the currency side, the firm is maintaining an overweight to the US dollar.
Invesco’s macro process drives the tactical asset allocation decisions over a time horizon between six months and three years, on average.
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