Real and Alternative Assets Outlook
Commodities
The committee upgraded Commodities to slight overweight from neutral. The commodity complex has rebounded since early February on the weakening dollar and the decline in global growth concerns, particularly relating to China. Oil has stabilized between $40 – $50/bbl after a strong run from the February lows, and U.S. rig count has ticked up slightly.
Hedge Funds
The committee upgraded Directional Hedged Strategies to slight overweight from neutral. Investing conditions over the past year have, for some strategies, been even more challenging than 2008, as high holdings concentration and crowded markets exacerbated poor performance. Redemptions have been pronounced, especially in activist and event-driven strategies. However, strategies such as hedged equities could experience a tailwind in the form of increased market volatility, and we also believe global macro and trend-following strategies could fare well as central bank and macroeconomic news continue to move markets.
Private Equity and Debt
Just as in public market equities, valuations for private equity have increased, but the valuation gap between public and private equity remains wide, making private equity still attractive on a relative basis. Valuations for small- and mid-market buyouts have been more expensive than for some larger-cap buyouts, as deals become more competitive. We continue to be positive on private debt.
Currency
USD: We remain overweight in expectation of stronger Q3 growth and consumer spending. Yield differentials are supportive and the downside may be limited by the fact that market positioning remains modest and the currency’s safe haven status. Risks to the view include the Fed shifting focus to international developments, low inflation expectations, disappointing economic data and U.S. election uncertainty.
Euro: We have moved to a slight overweight as evidence builds of a gradual growth recovery and more growth-friendly fiscal policies. Stimulus still in the pipeline should support domestic demand and economic activity. Further support comes from the region’s large current account surplus and the potential for risk aversion to trigger capital repatriation. Risks to the view include weaker-than-expected inflation dynamics leading to more ECB easing, and lingering concerns about the banking system.
Yen: We have maintained an underweight view given the wide yield differentials and the increasing concern at the Bank of Japan about the impact of the strong yen and worsening disinflation. Technically, market participants are very long the yen after Brexit and earlier disappointments from the central bank. Nonetheless, being long the yen remains a valid trade during a period of risk aversion and a growing current account surplus, and on PPP and real exchange rate bases the currency does look undervalued. Japanese investors are also hedging foreign assets more aggressively.
Pound: We have moved back to a slight overweight, as we feel that sterling is now undervalued following its large adjustment after the E.U. membership referendum. The Bank of England has eased already and is likely to wait for more data before easing again, but so far surveys and other data suggest a limited impact on U.K. growth, and the weaker currency could attract capital in the shorter term. Risks to the view include extended political uncertainty around the relationship with the E.U., the persistent current account deficit, and rising inflation due to the weakness in sterling during a period when the central bank is unable to raise rates.
Swiss Franc: We are still underweight the franc as we believe it is still overvalued and the Swiss National Bank will attempt to fight further appreciation. Technically, the Swiss franc remains one of the most attractive funding currencies. Risks to the view include an increase in geopolitical uncertainty and Switzerland’s positive current account balance.
About the Asset Allocation Committee
Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted and, through debate and discussion, to refine our market outlook. The panel covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 24 years of experience.
Committee Members
Joseph V. Amato
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Biography
Co-Chair & President and Chief Investment Officer
Erik L. Knutzen, CFA, CAIA
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Biography
Co-Chair & Chief Investment Officer—
Multi-Asset Class
Thanos Bardas, PhD
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Biography
Portfolio Manager, Head of Global Rates
Alan H. Dorsey, CFA
Chief Risk Officer
Richard Gardiner
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Biography
Head of Investment Strategy Group & CIO, Neuberger Berman Trust Company
Ajay Singh Jain, CFA
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Biography
Head of Multi-Asset Class Portfolio Management
David G. Kupperman, PhD
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Biography
Co-Head, NB Alternative Investment Management
Ugo Lancioni
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Biography
Head of Global Currency
Wai Lee, PhD
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Biography
Head of the Quantitative Investment Group, Director of Research
Brad Tank
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Biography
Chief Investment Officer—Fixed Income
Anthony D. Tutrone
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Biography
Global Head of Alternatives
This material is provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. All information is current as of the date of this material and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Neuberger Berman products and services may not be available in all jurisdictions or to all client types. Investing entails risks, including possible loss of principal. Investments in hedge funds and private equity are speculative and involve a higher degree of risk than more traditional investments. Investments in hedge funds and private equity are intended for sophisticated investors only. Indexes are unmanaged and are not available for direct investment. Past performance is no guarantee of future results.
The views expressed herein are generally those of Neuberger Berman’s Asset Allocation Committee which comprises professionals across multiple disciplines, including equity and fixed income strategists and portfolio managers. The Asset Allocation Committee reviews and sets long-term asset allocation models, establishes preferred near-term tactical asset class allocations and, upon request, reviews asset allocations for large diversified mandates and makes client-specific asset allocation recommendations. The views and recommendations of the Asset Allocation Committee may not reflect the views of the firm as a whole and Neuberger Berman advisors and portfolio managers may recommend or take contrary positions to the views and recommendation of the Asset Allocation Committee. Any currency outlooks are not against the U.S. dollar but stated against the other major currencies. As such, the currency outlooks should be seen as relative value forecasts and not directional U.S. dollar pair forecasts. Currency outlooks are shorter-term in nature, with a duration of 1–3 months. Regional equity and fixed income views reflect a 1-year outlook. Asset Allocation Committee members are polled on asset classes and the positional views are representative of an Asset Allocation Committee consensus. The Asset Allocation Committee views do not constitute a prediction or projection of future events or future market behavior. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed.
A bond’s value may fluctuate based on interest rates, market conditions, credit quality and other factors. You may have a gain or a loss if you sell your bonds prior to maturity. Of course, bonds are subject to the credit risk of the issuer. If sold prior to maturity, municipal securities are subject to gain/losses based on the level of interest rates, market conditions and the credit quality of the issuer. Income may be subject to the alternative minimum tax (AMT) and/or state and local taxes, based on the investor’s state of residence. High-yield bonds, also known as “junk bonds,” are considered speculative and carry a greater risk of default than investment-grade bonds. Their market value tends to be more volatile than investment-grade bonds and may fluctuate based on interest rates, market conditions, credit quality, political events, currency devaluation and other factors. High Yield Bonds are not suitable for all investors and the risks of these bonds should be weighed against the potential rewards. Neither Neuberger Berman nor its employees provide tax or legal advice. You should contact a tax advisor regarding the suitability of tax-exempt investments in your portfolio. Government Bonds and Treasury Bills are backed by the full faith and credit of the United States Government as to the timely payment of principal and interest. Investing in the stocks of even the largest companies involves all the risks of stock market investing, including the risk that they may lose value due to overall market or economic conditions. Small- and mid-capitalization stocks are more vulnerable to financial risks and other risks than stocks of larger companies. They also trade less frequently and in lower volume than larger company stocks, so their market prices tend to be more volatile. Investing in foreign securities involves greater risks than investing in securities of U.S. issuers, including currency fluctuations, interest rates, potential political instability, restrictions on foreign investors, less regulation and less market liquidity. The sale or purchase of commodities is usually carried out through futures contracts or options on futures, which involve significant risks, such as volatility in price, high leverage and illiquidity.
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