Calculated Risk: Fed's Kohn: Economic Outlook.
Excellent analysis of near-term economic prospects (though I continue to expect inflation as the bulk of the 1st stimulus hits the growing economy - a 2nd stimulus will almost ensure it).
Assuming Kohn is correct, what investment strategies should be considered?
1) Consider reducing equity exposure - prices are ahead of fundamentals most likely on improving optimism of a V-shaped recovery. If Kohn is correct, evidence will prove this optimism misplaced and prices will correct.
2) Consider reducing commodities exposure - commodities should still do well as demand from growing emerging markets increases but the near-term inflation worry will prevent significant price increases.
3) Consider increasing non U.S. exposure - emerging markets equities may be overpriced yet may still offer more upside than the U.S. in the near term. Emerging markets debt should be attractive as well.
4) Consider alternatives - lack of clarity suggests hedged strategies could be beneficial - you still participate in the upside but hopefully mitigate some of the downside risk. Other event driven strategies, such as merger arbitrage, could be attractive as well. Weaker companies facing prolonged challenges may sell out to companies with stronger balance sheets and better cash flow.
Just things to consider. Make your own decisions based on your own analysis, risk tolerance and return expectations.
Excellent analysis of near-term economic prospects (though I continue to expect inflation as the bulk of the 1st stimulus hits the growing economy - a 2nd stimulus will almost ensure it).
Assuming Kohn is correct, what investment strategies should be considered?
1) Consider reducing equity exposure - prices are ahead of fundamentals most likely on improving optimism of a V-shaped recovery. If Kohn is correct, evidence will prove this optimism misplaced and prices will correct.
2) Consider reducing commodities exposure - commodities should still do well as demand from growing emerging markets increases but the near-term inflation worry will prevent significant price increases.
3) Consider increasing non U.S. exposure - emerging markets equities may be overpriced yet may still offer more upside than the U.S. in the near term. Emerging markets debt should be attractive as well.
4) Consider alternatives - lack of clarity suggests hedged strategies could be beneficial - you still participate in the upside but hopefully mitigate some of the downside risk. Other event driven strategies, such as merger arbitrage, could be attractive as well. Weaker companies facing prolonged challenges may sell out to companies with stronger balance sheets and better cash flow.
Just things to consider. Make your own decisions based on your own analysis, risk tolerance and return expectations.
