February 2023 Portfolio Construction
By Alfred Lam, CFA, Senior Vice-President, and Head of Multi-Assets, CI Global Asset Management.
A Smooth Start (for now)
Investors’ appetites have increased as we entered 2023. Generally, at asset class level, the larger the loss in 2022, the larger the gain (recovery) in 2023, though this is only the data for January (see chart below). We recognize investors are feeling reassured by progress on several issues: First, China exited their zero-COVID restrictive policy and is now fully reopened. Second, inflation
is cooling and there is confidence it will gradually decline to 3% in 2023. As a result, central banks will at least pause hiking rates in the coming months. Third, the Russia/Ukraine situation, while unresolved, is also not getting worse. Last but not least, Europe was able to maintain healthy natural gas inventory as the winter was warmer than usual, hence lower drawdown.
The gains have been impressive considering the very short time frame. Our portfolios have had a similar experience: “recovery ratio” and performance were enhanced due to stronger performance in equity driven by an overweight allocation to China, small caps, and real estate. Hedging a portion of our USD exposure also added value. On the other hand, an overweight energy position was a detracting factor in January.
We do not expect the next 11 months to be as smooth as January. Some of the good news has been baked into asset prices, as we’ve seen from recent market rallies. We have made some adjustments including raising cash (which now has a yield of 4%), trimming bonds, and reducing Chinese and U.S. equity exposure. Cash will be re-deployed when opportunities arise, but must at least beat the 4% return hurdle. This means we will probably return to purchasing equity before bonds, bearing in mind a 10-year Canadian bond only yields 3.1% today (Feb 9, 2023).
Disclaimer
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