Our Asset Allocation in Detail

DISCOVER OUR ASSET ALLOCATION IN DETAIL

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EQUITIES

Preference for US equity markets maintained

Stock markets in 2024 should continue to ride the bull factors of 2023: falling interest rates and inflation, a resilient global economy and sustained corporate earnings. We remain overweight on US and underweight on EM.

US. 2023 got off to a flying start with stock markets putting on 15% in January alone. Later, they fell back as a banking turmoil erupted in March and 10-year yields and oil prices shot up between June and October. However, as inflation retreated and the rate outlook improved, US markets mounted a 25% rally in the final few months of the year, with AI-exposed stocks leading the charge. This has left stocks trading on apparently high valuations both in absolute terms and compared to bond yields. Nonetheless, corporate profits should remain strong as the economy completes its soft landing. Finally, momentum and sentiment indicators are in positive territory, suggesting the strong performance should continue. We therefore retain our preference for United States equity markets.

Europe. European markets had a remarkable performance in 2023, up more than 20% despite meagre domestic demand across the zone. As in the United States, falling 10-year yields meant 2023 finished on a positive note. Euro area markets continue to trade on attractive multiples – price/earnings ratios and spreads to bond yields are both close to their long-term average. Nonetheless, corporate profit margins are likely to remain modest amid weak growth and a persistently strong labour market. We therefore remain Neutral on European equities.

Style Preference

UK. The UK market lagged its peers in 2023, gaining just 8%, partly due to heavy exposure to energy stocks. However, valuations remain near their long-term average and upcoming bank rate cuts should provide some support. We therefore remain Neutral on the UK market.

Japan. The Japanese stock market advanced 28% in 2023 making it one of the year's top performers. Most of the gains happened between March and September as markets priced in reflation and a likely end to the Bank of Japan's yield curve control policy. With the economic story unchanged going into 2024, we remain Neutral on the Japanese equities market.

Equity markets: 2023 gains (partly) offset 2022 losses

Emerging markets. We remain Underweight emerging markets largely due to our scepticism about the economic outlook in China. Chinese equities posted one of the weakest performances of any market in 2023, losing 12% of their value as the expected post-Covid rebound disappointed and the property market struggled. Real estate is likely to remain weak in 2024, hence our Underweight.

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

Bonds, particularly corporate bonds, remain attractive

2024 will bring the pivot in main central bank rates as inflation retreats. This means that, despite a price surge in late-2023, bond markets remain attractive, particularly IG corporate credits.

RATES

US. 2023 was a year of volatility for sovereign debt. Following the spring banking turmoil, US 10-year yields took a rising path from May, attaining a 10-year high of 5% by October on fears of sticky inflation, only to drop back thereafter to 3.8% in late December. They then recovered somewhat, again topping 4%. Markets expect the US Federal Reserve (Fed) to pivot soon – discounting a 60% probability of a rate cut by March – and to cut rates sharply by 150 bps by year-end. Falling inflation plus some signs the labour market may be slowing should be enough to justify an easing of monetary conditions. The Fed may however opt for prudence and ease policy gradually as inflation edges down. In either case, the prospect of a Fed pivot boosts the appeal of bond markets, based both on current attractive yields and expectations of a further boost to valuations. We remain Neutral on US bonds with a duration Overweight.

Eurozone. Yields in Europe experienced similar volatility to the US in 2023. Having risen more slowly than US yields, most yields across Europe peaked in October with the French OAT at 3.5% and the German bund at 2.9%. Peripheral debt tracked a similar path. The Italy-Germany spread was a striking 150-200 bps in 2023. Yields subsequently fell back after November inflation figures showed a surprisingly sharp drop, allowing European bond markets to outperform their US equivalents. Since new year, yields have edged upward but markets still expect the ECB to ease policy soon – 80% probability of first cut by April – and sharply – by 150 bps by year-end. Like the Fed, the ECB may prove more cautious than markets expect as inflation is still showing signs of stickiness. Whatever the timing, the upcoming ECB pivot adds to the appeal of European bond markets. We remain Neutral on zone bonds with a duration Overweight.

UK. UK inflation may have surprised on the downside recently, but it remains well above European and US rates. Markets expect the Bank of England to pivot later (not before summer) and ease less sharply than other central banks. We remain Neutral on Gilts and Overweight duration.

CREDIT

Developed Markets. We remain Overweight investment grade corporate debt which offers better carry, despite a recent fall in yields, with limited risks under our soft-landing scenario.

Euro area: strong bond market performance

Currencies

Dollar Neutral in the short term

Currency market developments should continue to mirror monetary policy in 2024. We expect the Fed, the ECB and Bank of England to cut rates broadly in tandem. Consequently, we remain Neutral on these currencies. We also remain Neutral on the USD/JPY and Underweight the EUR/CHF.

Dollar Index. The dollar fell only marginally against other major currencies during 2023, with the DXY index losing 1% year-on-year. However, this is slightly deceptive. Drilling down, the dollar lost up to nearly 4% over the summer before rebounding to a peak of 3% up year-to-date in October. This roller-coaster ride primarily reflected changing expectations of Fed monetary policy. Moreover, the stable DXY performance conceals some large geographical divergences: sharp rises against the JPY and CNY (+10% and +4%) but sharp falls against, notably, the MXN (-13%), BRL and CHF (both -8%) and to a lesser extent the GBP and EUR (-5% and -4%, respectively).

EUR/USD. Having fallen to USD 1.04 over the summer, the euro rallied strongly from October – topping USD 1.10 in late December as market sentiment about the monetary cycle improved. We remain Neutral on the EUR/USD. In the short term, we anticipate movements in the cross will continue to be largely driven by monetary policy and we expect the Fed and ECB to start cutting rates at roughly the same time. 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 favour of the euro.

GBP/USD. The British pound has essentially shadowed the euro's performance against the dollar since July – falling sharply from July to October and then rallying strongly until December. However, the story was very different in the first half of the year, when sterling made much stronger gains, partly reflecting the resilience of the UK economy. We remain Neutral on the GBP/USD as we expect both countries to move monetary policies in sync and both run trade deficits.

USD/JPY. The yen also gained ground against the dollar after October but had fallen sharply earlier in the year, by 15% at its lowest point. We remain Neutral on the USD/JPY. The yen should be strengthened by the divergence of US and Japanese monetary policy – Japan is looking to exit deflation and abandon its yield curve control policy while the Fed is expected to cut rates. However, we still predict policy tightening in Japan will be a gradual process given the country's weak economic activity.

EUR/CHF. The Swiss franc rose sharply against the euro in 2023, gaining 6% despite Switzerland's much lower inflation: 1.7% in December compared to 2.9% in the euro area. The franc was boosted by the Swiss National Bank (SNB) running down its foreign exchange reserves, the franc’s safe-haven status and Switzerland's massive balance of payments surplus. These support factors should persist into 2024. We therefore remain Underweight the EUR/CHF.

EM Currencies. The big movements in emerging market currencies versus the dollar were a sharp fall by the CNY/USD, reflecting the ongoing troubles of the Chinese property sector, and gains by Latin American currencies (MXN, BRL), helped by friend-shoring and prudent economic policies.

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

ALTERNATIVES

A limited appeal in a context of high rates

Current high interest rates are making diversification into alternative investments less attractive. We remain Neutral on commodities but have reduced our gold position to underweight. While Hedge Funds are a reasonable option for diversification, they remain less attractive compared to fixed income products.

Commodities and gold

Commodities. Brent crude prices were highly volatile throughout 2023, reflecting the ups and downs of supply and demand and geopolitical tensions. Having traded between USD 80 and USD 85/bbl until March, oil prices then slumped to USD 70, their lowest since late-2021. Prices remained weak through most of the spring before rocketing over the summer to near USD 95 in September and then falling back to USD 75 in December. Crude prices could remain fairly stable at around USD 80/bbl for the next few weeks and months. There is excess supply from the US while OPEC+ countries are struggling to agree further cuts to production.

Gold. Gold prices rose sharply in 2023, from $1,825 an ounce to $2,060. It reached its all-time high at the beginning of December, benefiting in particular from the weakness of the dollar. Despite the sharp rise over the year, gold prices have been swinging significantly on the back of geopolitical tensions, inflationary risks and movements in the dollar.

Main Commodity Prices

Source: SGPB, Macrobond, Macrobond 10/01/2024

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Hedge funds

Long/Short Equity. Higher volatility and dispersions, coupled with the cycle nearing its end, should offer rich pickings for Long/Short Equity plays, at least those that follow non-directional strategies.

Event Driven. High interest rates are bad for M&A and make this fund category less appealing.

Fixed Income Arbitrage. With rates high, there are opportunities for funds playing sovereign debt. We retain our relative interest in funds positioned in the credits segment.

Global Macro / CTA. Commodity Trading Advisers (CTAs) are still doing well out of their traditional protection against market volatility, but the current period does not seem to offer the best entry point.