60% equities (10% DM small-cap, 30% DM and 20% EM), 30% fixed income (15% US Treasuries, 15% EM bonds) and 10% commodities.
On the asset class level, equity risks are reduced while the portfolio starts investing in long-term US Treasuries due to high interest rates and recessionary risks. The portfolio maintains some exposure to commodities for diversification, though inflation risks have declined from elevated levels.
The portfolio starts investing in small-cap stocks within equities due to its large valuation gap versus large-cap. The outperformance of small-cap stocks in the 1970s represents another reason to invest in small-cap stocks. Meanwhile, I maintain diversified exposure to ex-US stocks, which generally offer 10% long-term expected returns.
For fixed income, the portfolio has a barbell strategy, with half in US Treasuries and the other half in EM bonds. Given the soft-landing optimism in the market, there is an argument that a further switch from EM to US bonds is warranted. Nevertheless, both dollar and local-currency EM bonds offer 7%+ yields, while some LatAm central banks have started monetary easing on the back of decelerating inflation.
The portfolio continues to maintain decent exposure to EM assets with cheap valuations.
Risks to the portfolio:
- Stagflation in the US with a strong US dollar would negatively impact most of the assets in the portfolio.
- Continued tech rally would lead to underperformance of this portfolio versus a simple global equity index fund.
- A Japanification of the Chinese economy would lead to a further fall in EM and commodity assets.
liyufeili 