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The Macro View Investment strategy update — November 2021

By Yamilex Nunez
Vovember MacroView Investment update

Global securities markets delivered muted returns in the third quarter

Global securities markets delivered muted returns in the third quarter, apart from commodities, where energy prices continued to surge on higher demand and a shortage of supply. Third quarter global economic data indicated that the global expansion slowed, as supply chain disruptions and rising COVID-19 cases negatively impacted growth. The U.S. economy grew at an annualized rate of 2.0% in the third quarter, as a global chip shortage has impacted multiple industries and resulted in a lack of inventory that weighed heavily on the ability to consume goods, most notably motor vehicles. 

Personal consumption remains strong

On the other hand, personal consumption remains strong with spending on services continuing to rise at a consistent pace during the third quarter. There is also mounting friction in the employment market, where record job openings imply a major shortage of labor, which is triggering significant wage inflation, particularly for lower income workers. Moreover, higher energy prices and rising rents may begin to weigh on disposable income. While a number of inflation metrics may have peaked, Wilshire maintains a favorable view towards commodities as we continue to see inflation as a notable risk, particularly given the implications on interest rates and corporate earnings.

Wilshire remains supportive on equities

We remain supportive on equities, but they believe that equity market return expectations are becoming increasingly reliant on a balance of earnings growth and interest rates, with limited potential upside related to multiple expansion. The evolution of financial conditions in response to monetary policy will likely have implications on market leadership across the investment landscape, most notably within the equity asset class. 

The potential impact of tighter financial conditions

In this quarter’s Investment strategy update, we discuss the potential impact of tighter financial conditions on equities and fixed income, particularly given above trend growth and a consistently improving earnings outlook. This early-stage shift in financial conditions is likely to serve as a headwind for more expensive segments of the market, while serving to benefit cheaper assets such as foreign equities and U.S. value equities. This change in policy also introduces heightened interest rate risk, and therefore, we remain underweight duration risk (risk for longer term fixed income products e.g. a 30 year bond has more duration risk than a 1 year bond)  and core fixed income in favor of more flexible/alternative mandates that exhibit less duration exposure. The environment is evolving quickly and may be met with higher levels of volatility in both fixed income and equity markets. 

Wilshire continues to promote diversification

Wilshire continues to promote diversification and remains judicious in the allocation of our active risk budget, particularly as we witness market conditions reaching inflection points. We provide a summary of our positioning, rationale and supporting exhibits in the following sections.

Asset class perspectives November 2021

  • Fixed Income vs. Equity. Despite a positive economic outlook, which would normally be expected to benefit equities coming out of a recession, valuations are not materially more attractive in equities vs. fixed income, resulting in a neutral posture.
  • Large Cap vs. Small Cap Equities. We recognize that small caps are likely to benefit from an economic recovery, however given the dramatic level of recent outperformance in small caps, we believe that the early cycle recovery is mostly behind us.
  • Global ex-U.S. vs. U.S. Equities. Given relatively attractive valuations in non-U.S. equities, improving COVID-19 conditions, and in combination with the more pro-cyclical exposure of foreign markets, we view non-U.S. equities as more attractive at this stage of the business cycle.
  • Emerging vs. Developed Equities.  While emerging markets have recently underperformed, the technical, fundamental, and geopolitical backdrop does not support overweight exposure to emerging markets relative to developed markets. Given our move to overweight foreign equities relative to U.S. equities, this change in our view of emerging markets is only resulting in a modest reduction of exposure.

Macroeconomic outlook: Supply chain disruptions weigh on global growth

> IMF forecasts strong real GDP growth

Third quarter global economic data indicated that global growth slowed, as supply chain disruptions and rising COVID-19 cases weighed on consumption. Despite this softening in growth, the IMF recently maintained expectations for global growth of 4.9% in 2022 and continues to upgrade its forecast for U.S. growth from 4.9% to 5.2% (Exhibit A). 

Exhibit A

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> GDP slows on weaker consumption, net exports

The recent slowdown in economic growth in the third quarter was mostly attributable to weakness in personal consumption expenditures relative to prior quarters, as well as net exports (Exhibit B). 

Exhibit B

> Durable goods (motor vehicles) weighs on personal consumption

Looking more closely at personal consumption, durable goods contributed to a decline of -2.7% in real GDP (Exhibit C), which was almost entirely due to supply chain disruptions that resulted in a lack of inventory that weighed heavily on the sales of motor vehicles. Fortunately, consumer demand remains strong, as consumption of services contributed +3.4% to GDP. 

Exhibit CwxoIdBPZDN2pYGfu9a5 0I75IPX15HhLxNwbURQ 7a1bDiKosNQGUThi2evG0 gpqbM4eRfxzh54RJxKIqjaCyaxh4i7eHFKpRKizSFnnvU 6FAsNHIkJVTFCwfDVGrJJc0ppa4g

> Services PMIs continue to signal expansion

Measures of economic sentiment are also continuing to signal expansion, as services PMIs across all of the developed world remain above 50, as shown in Exhibit D. 

Exhibit D

eecaKXZbxbMz W1doNKl7LrTumkm 2Sm36y9solPbyIBeg FtI6ihhFEV5jmA6 nCwHz7Ts6Y3T5aEGy72rBjf6zALF9QWAbp6Kn0sFaVB5BL4VKs9XMYibiovwlWlnCHiC5DdzI

> Factories report slower deliveries

Nevertheless, the most recent ISM report showed that approximately 50% of factory purchasing managers continue to report slower deliveries, which is down from a high of nearly 60%, but indicates that friction in supply chains persist (Exhibit E).

Exhibit E

NDP25hyzrI2dbZ0bHSCRTaQ4NYZcukxp Cm4SaUBFyJOBKrOzv7ti7bu0g3jsGY XIPDQvLK6W0pWv8JRc nwiK GWNWxpRh4idkmM4W9Hvtk tDpxs wtytaEbAXfL4f3tTNRU

Sentiment, technicals , and risk

The recent pickup in both equity market volatility and interest rate volatility is reflective of a market that is increasingly fixated on monetary policy, as the Fed begins to taper purchases of treasuries and mortgage-backed securities, and investors look for indications of when (not if) the Fed will begin raising interest rates in 2022. U.S. equities, most notably large cap growth companies, have benefited from extraordinarily easy financial conditions, as shown in Exhibit F.

We are likely to see a gradual reversal in such conditions in response to higher inflation and interest rates, and above trend economic growth. This shift in financial conditions is likely to serve as a headwind for higher valued segments of the market, while serving to benefit procyclical and cheaper equities such as foreign and U.S. value equities. These valuation dynamics are supportive of our decision to be underweight growth equities, and U.S. related to Non-U.S., as well as an underweight to fixed income and duration in the short-term.

Exhibit F

QKhtRFhwd0vKXaWu9yM6CBQBycVrL8y AWjdHuHG8WkKik NE3kM681Q0V0AmBnHApaJIN2KuP88Sp5L63qWzjJ 8nKn9IwXC9dAAp XiX5 NUfmSo28fYMeS22O8fiwoncipFTO

Disclosure

This material, as well as the insights and data within, have been provided to MoneyLion by Wilshire Funds Management , Inc.

Wilshire Funds Management (“WFM”) is a business unit of Wilshire Advisors, LLC. This material contains confidential and proprietary information of Wilshire. It may not be disclosed, reproduced or redistributed, in whole or in part, to any other person or entity without prior written permission from Wilshire. This material is intended for informational purposes only and should not be construed as legal, accounting, tax, investment, or other professional advice. Past performance is not indicative of future results. This material may include estimates, projections and other “forward-looking statements.” Forward-looking statements represent Wilshire’s current beliefs and opinions in respect of potential future events. These statements are not guarantees of future performance and undue reliance should not be placed on them. Such forward-looking statements necessarily involve known and unknown risks and uncertainties, which may cause actual events, performance and financial results to differ materially from any projections. Forward-looking statements speak only as of the date on which they are made and are subject to change without notice. Wilshire undertakes no obligation to update or revise any forward-looking statements. Wilshire is a global financial services firm providing diverse services to various types of investors and intermediaries. Wilshire’s products, services, investment approach and advice may differ between clients and all of Wilshire’s products and services may not be available to all clients. For more information regarding Wilshire’s services, please see Wilshire’s ADV Part 2 available at www.wilshire.com/ADV. This material represents the current opinion of Wilshire based on sources believed to be reliable. Wilshire assumes no duty to update any such opinions. Wilshire gives no representations or warranties as to the accuracy of such information, and accepts no responsibility or liability (including for indirect, consequential or incidental damages) for any error, omission or inaccuracy in such information and for results obtained from its use. Information and opinions are as of the date indicated, and are subject to change without notice. Wilshire Advisors, LLC (Wilshire) is an investment advisor registered with the SEC. Wilshire® is a registered service mark. All other trade names, trademarks, and/or service marks are the property of their respective holders. Copyright © 2021 Wilshire. All rights reserved.

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