We are introducing a new macro framework to help guide our Global Asset Allocation decisions.
Asset performance is driven by the confluence of different factors, but one of the most relevant is, without doubt, the business cycle. Cyclical fluctuations have a direct impact on asset performance because two of the key determinants of asset prices (earnings growth and discount rates) are a direct function of GDP growth. But bearing in mind how relevant inflation has become over the last two years, we propose a new six-phase asset cycle, vs the traditional four-phase cycle.
From this perspective we propose both:
- A proprietary leading cyclical index.
- Our own framework to identify –with a reasonable degree of confidence– the state of the business cycle at different points in time, based on a six-stage asset cycle.
Our analysis shows that the effect of accelerated inflation growth is more noticeable when the strength of the cyclical signal is weaker, notably in the downturn and expansion phases. For this reason, we have also created an inflation acceleration indicator based on moving averages.
Our results prove that cycle theory based on these six stages is even more profitable and produces superior portfolio returns than the equivalent four-stage strategy. In addition, we found that the influence of inflation is more aggressive for corporates and high yield, than for equities.