2020 Long-Term Capital Market Assumptions

Strategic Perspective. It is difficult to imagine that only three months ago we were writing about riding out the first global recession, record levels of unemployment and declines in earnings not seen during any of our lifetimes. This historic decline was followed by historic policy action and subsequently a historic recovery. From the Solutions Team’s strategic perspective on asset allocation, we remain in our Base case scenario introduced last quarter and we feel the market has largely priced in a picture-perfect COVID and economic recovery, with the worst largely behind us. For the most part, the COVID charts we’ve been following are all still pointing up. In alphabetical terms, we would classify the recovery in the market and economy as squarely in the “V” territory, while the virus is still looking like a “U” (inverted) or maybe a cursive “W” if we want to get creative. Not unlike how we started the year, two long quarters ago, investors are faced with low returns for stocks and bonds, full valuations and political uncertainty.

+  Tactical View. Based on our macro regime framework, we expect the global business cycle to remain in a recovery regime, with growth below trend and expected to improve over the next few months. Meaningful, timely economic policy developments in Europe contributed to boost market sentiment, but the favorable cyclical outlook is threatened by a sputtering fiscal impulse in the US and potential for second waves of the virus and lockdowns. We maintain

a higher risk posture than our benchmark1 in our Global Tactical Allocation model, sourced through an overweight to equities, tilting towards (small) size and value stocks, and credit, while underweighting government bonds outside the US.

+  Global Market Outlook. The cyclical global macroeconomic and capital markets outlook
are critically dependent on the path of the pandemic and public health, monetary and fiscal policies. The longer-term outlook in turn depends both on how the pandemic, the cyclical recovery and structural reform of the international system and national economies all evolve. Both are uncertain, but both our short- and long-term views argue for diversification – not home bias, and a mix of risk-seeking and perceived safe assets in strategic asset allocation and tactical portfolio construction. The prospect of greater variety and variability in both national and corporate income, in diverging discount rates and in returns from greater friction in the international economy calls for active selection of countries, currencies, asset classes in the longer term.