How resetting valuation and increasing yields are making diversified portfolios attractive again
We can argue a long time between proponents of growth stocks and value stocks. The thing is that they are equally losing at the moment. Why? Because they are heavily correlated in a market downdraft. They are, in fact, competing for the bottom. On a one-year basis, their related performance is similar.
However, it doesn’t mean that the debate of growth vs value is futile. Quite the contrary, especially these days. After a massive one-sided trade over the past 10+ years, propelling growth stocks to the pinnacle, M2 is finally reducing and liquidity dries up. Risk gets repriced, and investors get better compensation for it.
Our vision is that global growth is being revised down in 2022 and interest rates can only go so high, until they form too heavy of a burden for Governments themselves. The big question remains about inflation. Similarly, it is hard to imagine that it would remain high in an economic slowdown, and it is equally likely to go down. Note that US personal savings rate was at 5.4% of disposable income as of May22, a 13-year low. The reserves depleted fast, even as consumer credit rose in the past few months.
In this scenario, current yields are starting to look attractive again. Three-year US treasuries are now at 3%, and the average OAS spread on corporate high yield is 5.5%. In alternative assets, further repricing is expected, as credit tightens up and makes VC, PE, and private credit transactions less flawless. Crypto, is the only alt asset that violently repriced already, and arguably start to show some value for it. Crypto is the unique alt asset that is marked-to-marked, which price reflects the level of risk at any point in time.
Where to go? Well, it might be a tad too early to return to directional positions in stocks or crypto, but there should be long-term value from the current levels onward. Equally, I wouldn’t sniff at income-based strategies, especially those that resets on a short-term basis, preserving liquidity for opportunistic plays. Assets that combine a long exposure and benefit from higher yields are financials, credit funds, and crypto as soon as all the leverage is washed out.
Give us a call if you struggle to find the right balance.
360 Advisory LLC is a Boston-based RIA managing investments, including crypto