Introducing bank loans
We expect the global economy to continue decelerating, while recent asset behaviour is what we would expect with acceleration. Consequently, we remain cautious, expecting a period of consolidation among cyclical assets.
Within our Model Asset Allocation we reduce high yield (HY) to Neutral, while adding to government bonds (still Underweight) and introducing bank loans at Overweight. The conservative stance is balanced by maintaining a regional bias towards emerging market (EM) assets.
We introduce bank loans to the Model Asset Allocation at an Overweight 6% (versus Neutral 4%). We view bank loans as somewhere between cash (with near zero duration) and HY (with default risk). The asset class may normally be expected to underperform HY once central banks cut rates but we find the valuation comparison to favour bank loans at the moment.