Our Asset Allocation
in Detail

DISCOVER OUR ASSET ALLOCATION IN DETAIL

Click the links to jump to a section, or flip the page to read all.

EQUITIES

Maintain Overweight to developed market equities

Equity markets have corrected sharply since early April. This follows a prolonged rally and seems to be driven by changing expectations for Fed rate cuts and rising geopolitical tensions. Nonetheless, the economic environment remains sound and we still expect rate cuts from the main central banks. We therefore remain Overweight US and equities, despite expensive valuations, and European markets. We also retain our Underweight to emerging markets, due to the weak Chinese economy. We also like cyclical stocks, which should continue to do well in a growing economy. On the other hand, we expect small cap companies to underperform, largely because of their high debt levels.

US. Having gained 10% in Q1, the US market lost around 3% last month, underperforming most of its major peers. Yet, its year-on-year performance remains impressive at over 20% and the correction has largely been driven by the downgrading of expectations for Fed rate cuts. Nevertheless, while its room for manoeuvre is shrinking, the Fed should still be able to trim rates in 2024. Also, US economic data continue to surprise on the upside, which should help sustain corporate profits. Stocks look expensive but momentum – measured as a 200-day moving average – and market sentiment remain bullish. We therefore stick with our Overweight on US equities. Our view on the artificial intelligence investment theme also gives us a heavier weighting to growth stocks.

Euro Area. European equities did well in Q1 and resisted well to the market correction, losing just under 0.5% on the month. In our view, they should continue to draw support from several factors. Valuations are attractive, market momentum is strong, and the economic bounce-back now seems locked in as the ECB is set to start its rate-cutting cycle in June – all of which is good news for corporate profits. We therefore remain Overweight European markets and, going forward, prefer growth stocks, which stand to gain most from the support factors mentioned above.

UK. Having underperformed poorly since November, the oil-heavy UK market made up ground last month as the price of crude rose. As with the euro area, strong momentum, cheaper multiples, and the prospect of rate cuts should support this market. We remain Overweight with a preference for value stocks.

Japan. Despite having gained more than 40% in the year to end-March, the Japanese market held up relatively well amid last month's global market slide. We remain Neutral on this market. Supportive factors such as the economic rebound, low interest rates and a strong tech weighting should offset the negatives (expensive valuations and weak market sentiment).

Emerging markets. Emerging markets retreated modestly less than the global index last month, despite sitting on a massive year-on-year underperformance. We remain at Underweight to emerging markets, partly because of the Chinese economy’s fragility but also because other markets in the index look overpriced, particularly in Asia.

Past performance does not prejudge future performance. Investments may be subject to market fluctuations, and the price and value of investments and the resulting revenues may fluctuate downward and upward. Your capital is not protected, and original investments may not be recovered.

FIXED INCOME

We remain constructive on bond markets

We remain Neutral on fixed-income products. With inflation easing, sovereign and corporate bond yields remain attractive both in nominal and real terms. Although volatility may likely stay high in the short term, the interest rate cuts expected in H2 should boost total returns.

US. US Treasuries rallied significantly last month. Yields on 2-year bonds – a proxy for where the market sees monetary policy a year from now – rose from 4.5% to 5%. The 10Y Treasury yield went from 4.2% to 4.6%, its highest since their October 2023. This upward drift mainly reflects renewed fears of overheating in the US economy and the pushing back of expectations for Federal Reserve (Fed) rate cuts. Data for Q1 show the economy is still growing at close to 3% while inflation figures have surprised on the upside, particularly in services, where inflation actually edged up. With this in mind, we now expect the Fed to start cutting rates in Q3-2024 with a second cut to follow in Q4. In these circumstances, we remain at Neutral on Treasuries, reflecting their attractive carry and our scenario of H2 rate cuts. We have also moved back to Neutral on duration.

Euro Area. Unlike Treasuries, yields on euro area sovereign debt have held broadly stable over the last month. The 10-year Bund is hovering around 2.4% and the 10-year OAT around 2.9%. Risk premiums on peripheral debt widened only modestly, with the Italian risk premium rising to 145 bp on a worse-than-expected 2023 budget deficit.

This relative stability reflects greater certainty in Europe than in the United States that inflation is beaten. The scenario of lower inflation and lacklustre growth should be enough for the ECB to start trimming rates in June, making synchronised rate cuts both sides of the Atlantic less likely. We remain at Neutral on euro sovereign debt. Volatility may be high for the short term but carry remains attractive and the start of the rate-cutting cycle persuades us to stay in this market. On duration, we have moved to Neutral, favouring 7 years duration.

UK. Gilt yields have tracked their US equivalents, rising from 3.9% to 4.3% over the past month. However, we remain Neutral on this market. Core inflation continues to fall, and given the weak economy, the Bank of England is likely to start cutting rates in the summer and continue at a similar pace to the ECB.

CREDIT

Developed Markets. We remain Neutral on investment grade corporate bonds (companies with good credit scores), which still have an attractive 4% carry rate and healthy balance sheets. We remain Underweight high yield credits (poorly rated companies), which look expensive and are generally issued by highly indebted companies that are currently more at risk.

Currencies

Overweight to US Dollar

We have switched to Underweight the EUR/USD and GBP/USD. We are thus Overweight the dollar which should strengthen in its principal crosses as monetary policy at central banks falls out of sync.

Dollar Index. The dollar continued its rally against most currencies as markets bet that booming prospects for the US economy would lead the Fed to delay the start of its monetary easing cycle.

EUR/USD. The euro fell over 2% versus the dollar to 1.06 EUR/USD this month, due to the likely desynchronisation of monetary policies between the Fed and the ECB. Favourable economic data and stubborn inflation in the US have been driving the Fed to hint at a delay of its first rate cut. As a result, the ECB seems likely to move first, not waiting for the Fed, which could strengthen the dollar against the euro. We have therefore moved from Neutral to Underweight on this cross, seeing further upside for the greenback versus the euro.

GBP/USD. Sterling lost more than 2% against the dollar during the month for reasons similar to the euro. Given the economic data, it seems equally likely the Bank of England will be bringing down rates before the Fed. We are therefore also moving from Neutral to Underweight on Cable.

USD/JPY. The yen continues to decline against the dollar, which rallied more than 3.5% against the Japanese currency this month, to 154.6 yen. The Bank of Japan may have hiked rates for the first time in 17 years last month – from 0% to 0.1% – but it will be some time before Japanese monetary policy gets back to normal. In the meantime, the spread to US rates will remain in play. That said, we remain Neutral on this cross. Japan still runs a large current account surplus and has substantial foreign exchange reserves which should cushion any fall in the yen. Finally, if pressure builds, the Japanese authorities have not ruled out coordinated action with the US.

EUR/CHF. The euro continues to claw back some ground against the Swiss franc, rising more than 0.5% on the month. The Swiss central bank was the first to lower policy rates, removing one of the props for its currency. Even so, we remain Underweight the cross as the ECB will shortly follow suit with rate cuts and the Swiss currency still has points in its favour, including its low inflation, strong current account surplus and safe-haven status.

EM Currencies. Emerging market currencies fell back sharply against the dollar last month as markets revised the likely timing of Fed rate cuts and US long yields rose. Latin American currencies fell hardest, being highly sensitive to dollar rates. The Brazilian real lost 4.1% and the Mexican peso 1.0%. In Asia, the Korea's won had the biggest drop versus the dollar, slipping 2.9% on a wide rate spread.

ALTERNATIVES & Thematics

Maintain gold and hedge fund Underweight

High interest rates continue to undermine the appeal of hedge funds and gold in our view, despite the recent strong performance of the precious metal. On Thematics, we are sticking with Artificial Intelligence and Clean Energy and adding two new themes: Reshoring and European Excellence.

Commodities and gold

Commodities. The price of a barrel of Brent experienced high volatility last month as intensifying tensions in the Middle East and industrial recovery in China were balanced by a continued rise in US production. Even if US output should limit the upside, the oil price will depend on what happens in the Middle East for the next few weeks. In Europe, natural gas prices rose close to 15% on the month amid supply concerns.

Gold. Gold continued its strong rally to near USD 2,400/oz, up around 10% on the month, on the back of geopolitical tensions and sustained purchases by emerging economies’ central banks (Russia, China and India). Given the current level of interest rates (nominal and real) and the jump in the gold price over recent months, we continue to Underweight gold.

How would you rate the content of this publication?

Excellent
Good
Poor

HEDGE FUNDS

Long/Short Equity. Long/short equity funds, which specialise in non-directional strategies, could do well in the current climate of high volatility and dispersion and the current stage of the economic cycle.

Event Driven. High interest rates and a shortage of liquidity continue to discourage firms from embarking on mergers and acquisitions. Funds specialising in such deals look unattractive for now.

Fixed Income Arbitrage. Some sovereign bond funds could benefit from higher interest rates. We retain our relative interest in funds positioned in the credits segment.

Global Macro/CTA. Commodity trading advisors (CTAs) are generally useful to hedge market volatility. However, their recent performance has left them looking insufficiently attractive in our view.

Themes

Reshoring. The Reshoring theme should benefit from resurgent national industrial policies following supply chains disruptions and trade and geopolitical tensions. These core of these policies lies with stimulus packages in both the United States (Inflation Reduction Act) and Europe (Next Generation EU). The theme has performed well on equity markets. Since late-2022, the index of industrial stocks in developed economies has had a positive dynamic, outperforming its benchmark.

European Excellence. After two tough years for the European economy, retreating inflation should not only allow the ECB to start its rate-cutting cycle but should also support household purchasing power and hence economic activity. Besides an economic upturn, the European equity market should also benefit from attractive valuations. To fully benefit from this combination of favourable factors, we favour international companies who are leaders of their market segment.