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

Moving to Overweight on Equity markets

Given the improved economic outlook and upcoming rate cuts, we have moved to Overweight on global equity markets, raising our position in European stocks from Neutral to Overweight. However, we remain Underweight emerging market equities.

US. 2024 began as 2023 had ended: massive outperformance by US equity markets led by the “magnificent seven” tech stocks. Major indices broke records. The stock market rally was matched by strong profit growth, with techs again leading the charge, so, despite expensive P/E ratios, the market remains below its valuation highs. Combining this with positive market sentiment and momentum, a sound US economy and the Fed about to embark on rate cuts, all these factors should support US stocks. We therefore maintain our Overweight United States markets.

Euro Area. European markets have also done well year-to-date, although not quite as well as their US equivalents. The euro area’s stocks continue to offer attractive value both on P/E and compared to sovereign bonds. Importantly, European markets offer a substantial discount to the US markets. Profit growth of euro are companies has lagged their trans-Atlantic peers but now seems to have bottomed out. As in the United States, sentiment, momentum and the prospect of key rate cuts should support the market further. We are therefore moving to Overweight.

Style Preference

UK. The energy-heavy UK market has significantly underperformed its peers since the beginning of the year. We have nonetheless switched to Overweight as the UK market enjoys the same support factors as the US and euro area.

Japan. So far this year, the Japanese equity market has outperformed the US market nearly two-fold and global markets four-fold in local currency terms. This outperformance comes on top of an exceptional 2023. Nonetheless, we remain at Neutral on the Japanese market, amid a still gloomy economic outlook for the country and risk of further yen depreciation, which has so far offset much of the gains for international investors.

Global equities – 12-month forward Price- to- Earnings ratio

Emerging markets. Emerging markets remain split between bearish Chinese markets and buoyant performances by other big players, such as India or Taiwan. With China's economy still weak and foreign investors remaining cautious on its markets, we remain Underweight China and hence emerging markets as a whole.

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

Back to Neutrality

We move from Overweight to Neutral on bonds, reflecting our return to Neutral on investment grade companies. We are taking profits on this segment after its recent rally. We remain generally constructive on the fixed income markets (except for high-yield corporate bonds) where carry is favourable and rate risk tilted to the downside.

RATES

US. US sovereign yields have been edging up since the turn of the year. The 10-year Treasury is back above 4%. January economic numbers point to solid economic growth and a resilient jobs market. Meanwhile, headline and underlying inflation continue to converge toward the Federal Reserve’s (Fed's) 2% target – at 2.5% and 2.9%, respectively, in December – but the services component remains above-target. Against this backdrop, the Fed confirmed it was planning to start a rate cut cycle over coming months but at a gradual pace. We remain Neutral on United States sovereign debt. Treasuries are still benefiting from the prospect of lower policy rates and quantitative tightening. However, a robust economy and jobs market and sticky services inflation should keep long yields around 4% over the coming months.

Euro Area. Euro area sovereign bond yields have also been increasing, with the 10-year bund and OAT hitting 2.3% and 2.9%, respectively. Yields on peripheral debt have continued the healthy trend of 2023, with the Italian spread over Germany narrowing to 150 bp. As in the United States, these movements show

Duration preferences

markets pushing back the timing of expected ECB rate cuts. The ECB, concerned about a continually tight labour market and upward pressure on wages, has said it will not be cutting rates until core inflation is on a clearer track toward its 2% target. We also think the ECB is likely to synch its cuts with the Fed's to keep the euro steady. We remain Neutral on European sovereign debt.

UK. Gilts have been broadly stable so far this year. The British economy continues to stutter but inflationary pressure remains higher than in continental Europe, which means the Bank of England is set to keep rates at 5.25% and only start cutting after the Fed and ECB. We therefore remain Neutral on Gilts.

CREDIT

Developed Markets. We move from Overweight to Neutral on investment grade credit. Total return on IG corporate debt has surged since November as yields have come down from 6% to 5% for US companies and from 4.8% to 4.0% for their European peers. As a result, risk premia have shrunk near historical lows. In these circumstances, we have taken profits while remaining constructive on the asset class as companies are still sitting on solid balance sheets. We remain Underweight on the high-yield segment.

Sovereign bond yields vs Pan-European corporate IG bonds

Currencies

Maintaining neutrality on USD

The dollar started the year with gains against most developed and emerging market currencies thanks to superior growth in the US. But with central banks set to synchronise rate cuts we remain Neutral on the EUR/USD and GBP/USD.

Dollar Index. Major emerging market currencies have lost ground against the dollar this year, undermined by gaps in growth and interest rates (see below). The dollar has also rallied against developed economies, but this mainly reflected the yawning gap in growth trends.

EUR/USD. Early in the year, the euro fell by 2.4% against the dollar to a low of 1.07 EUR/USD, reflecting the widening trans-Atlantic growth gap as the US boomed while Europe stagnated. We remain Neutral on the EUR/USD. In the short term, we think movements in the cross will continue to be mainly driven by monetary policy and we expect the Fed and ECB to start cutting rates at roughly the same time.

GBP/USD. Sterling has also been falling against the dollar but less steeply since the start of the year, ending 0.8% down on 1.26 GBP/USD. The pound's resilience reflects a perception that monetary policy will stay tighter for longer in the United Kingdom given its higher inflation. We remain Neutral on the GBP/USD as we expect both countries to move monetary policies broadly in sync and both run trade deficits.

Longer term, balance of payments issues should come to the fore and with the euro area in surplus and the United States in deficit this will play in the euro’s favour.

USD/JPY. The yen again experienced the biggest fall against the dollar of any developed currency, falling 5.5% year-to-date to 149 JPY/USD. In fact, the JPY has been depreciating for more than a year, losing 12% overall, as the Bank of Japan has opted to keep monetary policy highly accommodative with negative interest rates and a continuation of yield curve controls. Even so, we remain Neutral on the USD/JPY. The Fed is likely to step rates gradually down in 2024 while the Bank of Japan will likely exit its accommodative policy as inflation steadies around the 2% target. Moreover, Japan continues to run a current account surplus, supporting the yen in the medium term.

EUR/CHF. The euro gained around 1,4% against the Swiss franc this year, to 0.94 CHF/EUR, as the SNB has intervened on markets to curtail further gains by an already overvalued franc. We, though, remain Underweight the EUR/CHF as the franc’s support factors (low inflation, strong current account surplus and safe-haven status) have not gone away.

EM Currencies. Since the start of the year the Chilean Peso (CLP) has fallen by 7% and the Brazilian Real (BRL) by more than 2%, principally because both countries have started to cut interest rates. In Asia the South Korean Won (KRW) and Taiwanese Dollar (TWD) have also fallen against the US dollar, by 3% and 2% respectively, as with little to fear from inflation their central banks have kept monetary policy accommodative. The Chinese Yuan (CNY) has lost just 1%, but this low volatility reflects an increased level of currency control by the authorities. Lastly, the Turkish Lira has been plagued by troubling levels of inflation which have forced it down to near all-time lows against the dollar.

USD vs. main currencies (100=01/01/2023)

ALTERNATIVES

Still underweight gold and hedge funds

Despite falling sharply at the end of 2023, interest rates remain high. Against this backdrop, we continue to find alternative assets relatively unattractive. We therefore remain underweight on these assets and gold for similar reasons. We are maintaining our neutral position on commodities.

Commodities and gold

Commodities. Months go by but the story remains the same. Oil prices are still in shock to events in the Middle East, where tensions remained rife last month. Brent prices touched USD 84/bbl after a murderous attack on a US base in Jordan, claimed by Iran-backed rebels, stoked fears of escalation. In the end, Brent fell back to USD 78, near its year-start level. There are also downward pressures on prices, including a slowing of European and Chinese economies, rumours of a potential ceasefire in Gaza and surplus oil supply being pumped out by the United States. Brent has risen by 5.6% since the beginning of the year. Natural gas fell by 22% over the past four weeks due to lower European demand, stronger-than-expected production and a good weather forecast for February.

Gold. Boosted by geopolitical tensions, gold hit USD 2,060/oz in early February before falling back as news of a resilient US economy pushed back the prospect of a rate cut away from March. As a result, gold traded a range of USD 2,000 and 2,050/oz over the past month.

Main Commodity Prices, 100=-1y

How would you rate the content of this publication?

Excellent
Good
Poor

Hedge funds

Long/Short Equity. Funds in this category following a non-directional strategy could benefit from the current market environment (volatility and dispersion) and positioning in the economic cycle.

Event Driven. M&A transactions continue to suffer from the high level of interest rates and the drying up of liquidity. Funds in this category therefore appear unattractive.

Fixed Income Arbitrage. Some funds positioned in sovereign bonds could benefit from higher interest rates. We remain relatively interested in funds positioned on the credit side.

Global Macro / CTA. Commodity Trading Advisors (CTA) funds are generally useful as a hedge against market volatility. However, given their recent performance, we do not think they are sufficiently attractive.