Our Asset Allocation
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DISCOVER OUR ASSET ALLOCATION IN DETAIL

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EQUITIES

We maintain our Overweight to developed equity markets

Global equity markets were rocked last month by several factors: political events including French snap elections and the turbulent US Presidential campaign, expectations for Fed rate cuts and, lastly, sector and style rotation by investors. They nonetheless managed a firm performance – up 2.6% month-on-month and 19% year-on-year – albeit with major discrepancies by region and sector. We stand by our Overweight to developed equity markets, based on cheap value in Europe and healthy earnings growth in the United States.

US. The US stock market continued to rally over the past month (+1.8%, +23% over a year). This strong monthly performance, however, disguises major discrepancies between sectors and styles, particularly since the start of July. Escalating expectations of Fed rate cuts triggered a rotation toward value stocks, small and mid-caps and defensive sectors. Fears of worsening trade relations between the US and China then sent growth stocks tumbling further. We remain Overweight US equity markets which should continue to benefit from healthy – though slightly slowing – growth, the steady decline in inflation and limited rate cuts. Corporate profits and balance sheets are still looking good, justifying the premium priced into company multiples. We remain Neutral on investment style: while falling rates are traditionally good for growth stocks this segment currently looks overpriced.

Euro zone. European equities underperformed again last month (0.7%), hit by unexpectedly weak economic data, political uncertainty in France and China/US tensions. Even so, we stand by our Overweight to these markets, with our rationale being that the economy should remain strong, driven by a rebound in real household incomes as inflation retreats and rates fall. Also, private sector investment is likely to be sustained by healthy corporate margins and a catch-up of past underinvestment. Finally, European markets are still cheap in absolute terms and close to their long-term average relative to bond yields. That said, we have shifted to Neutral on style (having previously favoured growth stocks).

UK. Despite the market’s heavy value bias, British stocks slightly underperformed the global index last month. Nevertheless, they can count on several support factors going forward: interest rate cuts, reviving economic growth and the restoration of a degree of political stability. Cheap-looking valuations and improving earnings growth will also be good for the UK market, where we remain Overweight.

Japan. The Japanese equities market, which boasts one of the world’s best year-on-year performances, outperformed the global index last month (+6.3%). We remain Neutral on this market, which should get a boost from the end of deflation and gradual exit from the zero-rates policy but could be held back by yen volatility and its heavy weighting toward technology and communication sectors.

Emerging markets. Emerging markets outperformed the global index over the last month (+3.5%) as the plunge in the Chinese market was offset by rallies elsewhere, notably in Latin America and India. A heavy weighting toward technology stocks, geopolitical risks and the weakness of the Chinese economy make us cautious on these markets. However, we are sticking with our Neutral stance due to the attractive value they offer.

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 19/07/2024, publication completion date. 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

Still positive on bonds

We remain Neutral on fixed income. With inflation easing, sovereign bond and corporate bond yields remain temptingly high in both nominal and real terms. We are long duration on our government bond yield exposure and Neutral on high-yield (and investment grade) bonds to play the attractive carry and still solid balance sheets offered by most issuers in this class.

US. Sovereign yields have narrowed since early June. Yields on the 2-year Treasury bill (proxy for monetary policy one year out) have fallen from 4.7% to under 4.5% and yields on the 10-year T-bond from 4.3% to 4.2%. These falls reflect the market's expectations for Fed rate cuts following good news on inflation and an ongoing rebalancing of the labour market. Inflation continued to slow in June – including, importantly, the price of rent and equivalent rent – bringing it near to the Fed's 2% target. Moreover, while the US economy continues to create lots of jobs, unemployment has edged up to 4.1%, again close to the Fed's “target”. In these circumstances, the Fed is likely to start cutting rates in September and cut again at its December meeting taking the Funds rate to 5% at year end. We therefore remain Neutral on Treasuries but with a preference for long duration to play the fall in inflation and the downhill leg of the rate cycle.

Euro Area. Sovereign bond yields in the zone have also fallen substantially over the past month on political risk in France, further falls in inflation and the easing of monetary policy. Yields on the 10-year Bund and OAT dipped around 20 bps to 2.4% and 3.1%, respectively. This still leaves the French risk premium higher than before parliamentary elections were called. Finally, the sovereign

yields paid by peripheral economies also fell and their risk premiums are now back to pre-French-election levels. European inflation continues its gradual decline (2.9% year-on-year), helped in large part by sharp falls in durable goods inflation. Wage growth easing should also help take the sting out of services inflation in coming months. In this context, the ECB held its deposit rate at 3.75% at its July meeting and we expect it to make two further rate cuts in 2024 to end the year at 3.25%. We therefore remain Neutral on European sovereign debt but with a preference for long duration to play the fall in inflation and downhill leg of the rate cycle.

UK. We also remain Neutral on gilts, with a preference for long duration. The 10-year gilt yield fell last month, to 4%, with the Bank of England expected to start cutting rates in September.

CREDIT

We are Neutral on high-yield corporate debt. This asset class has done well this year, up 4% thanks to a resilient growth environment, ongoing declines in inflation and substantial carry of 6.6%. Moreover, companies continue to enjoy solid fundamentals, with a higher proportion of rated BB companies in the index, while the index's short duration limits the risk of total return losses if rates should spike.

Currencies

Dollar Neutral

We have shifted to Neutral on the EUR/USD and GBP/USD crosses as the Fed and BoE both look likely join the ECB in cutting rates in September. We remain at Neutral on the USD/JPY given the Bank of Japan's snail-like progress toward normalising policy.

Dollar Index. The US currency lost ground in its key crosses with developed and emerging market currencies. This drop in the dollar reflects growing expectations that the Fed will start cutting rates in September.

EUR/USD. The single currency gained almost 2% against the dollar last month, rising to USD 1.09. Euro strength mainly reflects growing expectations that the Fed will start cutting rates in September and that the ECB will make its second cut the same month. The narrowing spreads between euro and dollar rates translated into gains for the euro. We have therefore moved to Neutral on the EUR/USD as we expect the two central banks to cut rates at a similar pace.

GBP/USD. As with the euro, we have switched to Neutral on the GBP/USD. Sterling gained more than 1% against the dollar, tracking the rise in expectations for Fed rate cuts. We anticipate the Bank of England will start its own series of rate cuts in September (or possibly August), from the current base rate of 5.25%, as core inflation (3.5% year-on-year in June) continues to edge gradually down toward target. This synchronisation in the pace of interest rate cuts should keep sterling’s crosses steady at current exchange rates.

USD/JPY. In a break with the trend of recent quarters, the JPY rose more than 1% against the dollar to 157 USD/JPY. This rally again illustrates the sharp jump in expectations for a September rate cut by the Fed, the US rate spread to Japan being the biggest with any developed economy. It also seems likely that the Japanese monetary authorities stepped in to support the yen. We remain Neutral on the USD/JPY. First, the BoJ will continue to crawl toward a more normal policy stance. We expect two rate hikes in H2-24 while Fed rate cuts are likely to be gradual. Second, the country's balance of payments remains heavily positive, limiting further downward pressure on the yen.

EUR/CHF. The euro fell by around 1% against the Swiss franc to 0.96 EUR/CHF last month. We remain Underweight this cross. Political uncertainties in Europe should be good for the Swiss franc, particularly given the wider political risks in the world. Also, Switzerland's heavy balance of payments surplus coupled with a reduction in the Swiss National Bank's foreign exchange reserves should help the franc.

EM Currencies. It has been a mixed story for emerging market currencies in the past month. The Mexican peso made good part of its post-election losses, rising 3.2% against the dollar as monetary policy was kept tight, allaying market concerns. The Chinese yuan continues its slow slide as CNY rates continue to come down.

ALTERNATIVES & Thematics

We retain our Underweight to gold and hedge funds

High interest rates tarnish the appeal of hedge funds and gold. Theme-wise, we retain our exposure to Artificial Intelligence, Clean Energy, Reshoring and European Excellence, and have added another, Health Innovation.

Commodities and gold

Commodities. Apart from a short-lived spike to USD 88/bbl in early July, Brent prices traded between USD 84 and USD 86 last month, ending slightly up on the month as a whole. Oil prices were led by greater confidence in growth-friendly rate cuts by the Fed, the fall in US oil stocks and signs of persistent weakness in the Chinese economy.

Gold. Gold touched a new all-time high of USD 2,482/oz last month and ended the month up 5%, helped by the prospect of US rate cuts which would weaken the dollar and the increasing probability that Donald Trump will return to the White House and revive geopolitical tensions with China.

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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 as a way to hedge market volatility. However, their recent performance has left them looking insufficiently attractive in our view.

Themes

Current themes: Artificial Intelligence, Clean Energy, Reshoring and European Excellence. Even after 18 exceptional months, we think Artificial Intelligence stocks will continue to perform well, given the maturity and potential of AI and the strong profit growth of companies in the sector. The Clean Energy theme is a way to invest in winners from the energy transition. The Reshoring theme should benefit from the return of industrial policies and perform strongly on equity markets. Finally, the European Excellence theme is a way to cash in on a combination of positive factors – falling inflation, cuts to ECB rates and attractive valuations – via international companies that are leaders in their respective markets.

New theme: Healthcare Innovation. An ageing population, changing lifestyles with a greater interest in physical fitness, well-being and nutrition, coupled with major technological progress (gene therapies, immunotherapy, personalised medicine, remote health services, etc.) should benefit the health sector as a whole and its innovation component in particular. This theme thus represents an opportunity to invest in cheaper-valued stocks that offer long-term growth.