Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (2024)

  • Home
  • Asset allocation highlights – Expectations out of line
Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (1)

Portfolio perspectives | Article - 2 Min

Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (2)Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (3)

2 Authors - Portfolio perspectives

08-02-2022 · 2 Min

Given that the current downturn really is global, we are struck by the gap between optimistic equity analyst views and the caution voiced by economists. We also do not follow the market’s belief that central banks will not raise interest rates by as much as had been thought given the poor economic news. Can the end of their rate rising cycle already be in sight?

Not for us. Inflation is unlikely to fade quickly enough. The Ukraine war will likely keep (commodity) prices high; supply-chain bottlenecks will not be easing anytime soon. High house prices will likely keep pressure on rents for months to come. Wage demands are rising in response to a tight labour market and high inflation.

We expect it to take more central bank tightening, and a bigger slowdown in growth, before inflation falls to anywhere near policymakers’ targets. Consequently, we are underweight duration.

Earnings season

In this context, the latest earnings season has nonetheless been encouraging. Excluding a strong showing by the energy sector and large declines for financials, both sales and earnings growth have been positive (and above expectations). We do not think this can last. Current forecasts (see Exhibit 1) do not gel with the economic slowdown we anticipate. Earnings will likely fall and equity prices should follow suit.

The lack of any contraction in global earnings being priced in now contrasts starkly with the 9-17% drop in earnings that is likely when they return either partly or fully to trend. A 9% fall places the price/earnings ratio at 16.3x for the MSCI US – roughly where it is today. A larger 17% fall is consistent with a P/E of around 19.5x, while a meaningful recession could see a 35% drop in earnings.

Portfolio adjustments

Our multi-asset portfolios are cautiously positioned: we are seeking to increase risk gradually in areas such as high-grade corporate credit and commodities, while we are underweight duration and neutral on equities.

We made four changes to portfolio positioning during the month:

  • First, we upgraded credit to ‘favour’, looking in particular at European investment-grade credit where distress is now pronounced and where the valuation opportunity looks increasingly attractive. European IG appears to be pricing in an 8-10% implied default rate – that is twice the worst rate over the last five years and eight times the historical average. That looks too gloomy given the shallow 2001-style correction we expect and the broadly healthy corporate finances.
  • Second, in European duration, we tactically deepened our short. Responses to the gas crisis are likely to be fiscally-led given central bank concerns around inflation in the near term and the propensity for tighter policies.
  • Third, we deepened our tactical exposure to commodities. Fundamental supports include resource nationalism and greenflation, but also geopolitics – commodities typically benefit in uncertain times. There is also a clear scarcity of supply. Finally, there is support from Chinese macroeconomic policy which continues to lean towards easing.
  • Fourthly, we sold our modest emerging market exposure, while keeping our Chinese and Japanese exposures against a broadly offsetting European short.

Asset class views

Read the full report


Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (6)

Please note that articles may contain technical language. For this reason, they may not be suitable for readers without professional investment experience. Any views expressed here are those of the author as of the date of publication, are based on available information, and are subject to change without notice. Individual portfolio management teams may hold different views and may take different investment decisions for different clients. This document does not constitute investment advice. The value of investments and the income they generate may go down as well as up and it is possible that investors will not recover their initial outlay. Past performance is no guarantee for future returns. Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions). Some emerging markets offer less security than the majority of international developed markets. For this reason, services for portfolio transactions, liquidation and conservation on behalf of funds invested in emerging markets may carry greater risk.

    • Central banks
    • Inflation

Related insights

3:48 MIN


| Video - 3:48 min

Asset allocation - Still looking to buy dips

Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (8)


03-03-2020 · 3:48 MIN

3:48 MIN


| Video - 3:48 min

Asset allocation video – Watching the balancing act between curbs and exits

Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (10)


05-07-2020 · 3:48 MIN

Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (11)

In the U.S., this material is for Institutional use only – not for public distribution. This material is provided for educational purposes only and is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be and should not be interpreted as recommendations. Reliance upon information in this material is at the sole risk and discretion of the reader. The material was prepared without regard to specific objectives, financial situation or needs of any investor.

These documents and video clips may also include information obtained from affiliated investment management companies within BNP Paribas Asset Management, the brand name of the BNP Paribas group’s asset management services. The documents and video clips are produced for informational purposes only and do not constitute: 1. an offer to buy nor a solicitation to sell, nor shall they form the basis of or be relied upon in connection with any contract or commitment whatsoever or 2. investment advice. Any opinions included in these documents and video clips constitute the judgment of the author/ presenter at the time specified and may be subject to change without notice.

This material may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections, forecasts, and estimates of yields or returns. No representation is made that any performance presented will be achieved by any funds, or that every assumption made in achieving, calculating or presenting either the forward-looking information or any historical performance information herein has been considered or stated in preparing this material. Any changes to assumptions that may have been made in preparing this material could have a material impact on the investment returns that are presented herein. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a product or strategy.

The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by BNP PARIBAS ASSET MANAGEMENT USA, Inc. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets.


BNP PARIBAS ASSET MANAGEMENT USA, Inc. is registered with the U.S. Securities and Exchange Commission as an investment adviser under the Investment Advisers Act of 1940, as amended. BNP PARIBAS ASSET MANAGEMENT USA, Inc. is a registered trademark of BNP Paribas or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners. © 2023 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP PARIBAS ASSET MANAGEMENT is the global brand name of the BNP Paribas group’s asset management services. © 2023 BNP PARIBAS ASSET MANAGEMENT USA, Inc., All rights reserved.

BNP Paribas Asset Management seeks to integrate environmental, social and governance (“ESG”) factors into all of our portfolios as a means to mitigate certain short, medium and long-term financial risks, identify better long-term investments, and encourage more responsible corporate behavior. We will never subordinate our client’s interests to unrelated objectives. Certain issuers and industries are excluded from our actively managed portfolios based upon our view of their ESG performance and risk profile. As a result, we may pass up certain opportunities when these excluded issuers or industries are in favor. Due to significant gaps in disclosure regimes around the world, we may need to rely upon voluntary disclosures by issuers, which are often not audited. We therefore may not have consistent access to complete, accurate or comparable information about the ESG performance of our holdings. Please consult the applicable offering document for more information about the specific ESG strategy employed by each investment strategy since a given strategy may not have specific ESG guidelines, and investments are not limited to securities that are ESG compatible.

To access insights from our teams worldwide visit:

Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (12)

Explore VIEWPOINT today

I'm an investment expert with a robust understanding of financial markets and economic trends. My experience and knowledge in the field position me as a reliable source for insights on asset allocation, portfolio management, and market dynamics. Let's delve into the key concepts highlighted in the provided article titled "Home Asset Allocation Highlights – Expectations out of Line."

The article touches upon several critical points, and I'll break down the key concepts for a better understanding:

  1. Global Downturn and Discrepancy in Views:

    • The article starts by noting the global nature of the current economic downturn.
    • It highlights the gap between optimistic equity analyst views and the caution expressed by economists.
    • Questions the prevailing market belief that central banks won't raise interest rates as much as expected.
  2. Inflation and Contributing Factors:

    • Argues against the possibility of the end of the rate rising cycle, citing that inflation is unlikely to fade quickly.
    • Attributes factors like the Ukraine war, high commodity prices, persistent supply-chain bottlenecks, high house prices, and rising wage demands as contributors to sustained inflation.
  3. Earnings Season and Contradictions:

    • Acknowledges the positive outcomes of the latest earnings season, excluding specific sectors.
    • Expresses skepticism about the sustainability of positive earnings growth, given current economic forecasts that do not align with anticipated economic slowdown.
    • Forecasts a potential decline in earnings and suggests that equity prices may follow suit.
  4. Portfolio Adjustments:

    • Discusses a cautious portfolio positioning, seeking to gradually increase risk in high-grade corporate credit and commodities.
    • Four specific changes made to portfolio positioning are outlined:
      • Upgrade of credit to 'favour,' particularly in European investment-grade credit.
      • Tactical deepening of the short position in European duration.
      • Increased tactical exposure to commodities based on fundamental supports and geopolitical factors.
      • Sale of modest emerging market exposure while maintaining exposure to Chinese and Japanese markets.
  5. Market Outlook and Asset Class Views:

    • Highlights the current lack of contraction in global earnings being priced in, contrasting it with the expected drop in earnings.
    • Discusses potential scenarios of a 9-17% drop in earnings and its impact on price/earnings ratios.
    • Concludes with a note on being underweight duration and neutral on equities.
  6. Disclaimer:

    • Provides a disclaimer emphasizing that the article is for educational purposes only and not intended as investment advice.
    • Warns about the risks involved in investing, especially in emerging markets or specialized sectors.

This breakdown covers the major themes in the article, offering a comprehensive overview of the author's perspectives and recommendations. If you have specific questions or need further clarification on any of these points, feel free to ask.

Asset allocation highlights – Expectations out of line - EN - BNPP AM USA institutional investor (2024)
Top Articles
Latest Posts
Article information

Author: Fredrick Kertzmann

Last Updated:

Views: 6379

Rating: 4.6 / 5 (46 voted)

Reviews: 93% of readers found this page helpful

Author information

Name: Fredrick Kertzmann

Birthday: 2000-04-29

Address: Apt. 203 613 Huels Gateway, Ralphtown, LA 40204

Phone: +2135150832870

Job: Regional Design Producer

Hobby: Nordic skating, Lacemaking, Mountain biking, Rowing, Gardening, Water sports, role-playing games

Introduction: My name is Fredrick Kertzmann, I am a gleaming, encouraging, inexpensive, thankful, tender, quaint, precious person who loves writing and wants to share my knowledge and understanding with you.