It is better to be vaguely right than exactly wrong

This first edition of Paul Jackson of Source IM’s The Big Picture asset allocation view for 2105 has been published today.

The Big Picture distils Paul’s views about a wide range of assets into the Source Multi-Asset Portfolio (SMAP).

The Big Picture is how Source IM will communicate its views about a broad range of asset classes and geographies.

Macro in orientation, asset allocation choices will be need constrained to a limited number of key decisions, for as JM Keynes said: “it is better to be vaguely right than exactly wrong”.

The US economy is strong enough to keep the Fed on a tightening path, but the global bias is towards easing.

Paul Jackson says: "Sovereign bonds are caught in the middle: equities, real estate, high yield and emerging market debt provide better alternatives. Non-US assets must fight against the strengthening dollar".

His main investment themes are:

Underweight Government Bonds – We are particularly conservative on US Treasuries (where we prefer short duration bonds) due to the incoming rise in rates. We’re neutral on Eurozone and Japan (thanks to local QE programs). EM is the area we are more bullish on, as a number of central banks in the area are likely to loosen (in Brazil, China, India and Russia, say).

Underweight Corporate Bonds – Though we think spreads to government bonds can narrow further, this asset class will not escape forever the bleak outlook on sovereign debt. US is the most preferred area, due to the projected currency movements.

Overweight High Yield – Yields are high relative to other fixed income assets and we expect them to fall in the short term, giving a favorable outlook. In addition, we are not worried by default rates as we do not expect recession. We prefer US, as the economy continue to expand, over the Eurozone, that is still dragged by a fragile economy

Overweight Equities – Valuations are no longer cheap, but remain far from the extremes of fixed income. At this stage of the cycle equities tend to outperform. Couple that with the global easing bias and it becomes difficult to argue against the asset class. We prefer Eurozone, Japan and China (both duecentral bank policies and upturn in their economic cycles).

Overweight Real Estate - Real estate will have a strong 2015 on the back of cyclical tailwinds. We keep our dividend growth estimates slightly below probability-weighted historical averages and assume a tad of re-rating. Japan and Europe stand out: valuations seem reasonable and most markets seem to have turned a corner in Europe, while the BOJ’s plan to purchase J-REITs should provide boost in Japan.

Underweight Cash - Expected returns are weak due to abnormally low central bank rates and are negative in many cases when translated into USD (we expect dollar appreciation)