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

Slight strengthening of the US market

We remain Neutral overall on equity markets but are slightly increasing our exposure to US equity markets at the expense of emerging market equities. We further continue to maintain our preference for the Euro area and UK markets.

US. We are moving from Underweight to Neutral on US equities. The US economy has proven its resilience since the start of the year despite some significant headwinds, such as bank failures and debt ceiling discussions. GDP grew 1.3% (year-on-year) in Q1 2023 and, based on purchasing managing surveys, should stay on the right path in H2. Falls in headline inflation open up the prospect of household incomes growing in real terms, supporting the outlook for resilient household consumption. What is more, surplus savings accrued during Covid remain close to 4% of GDP (compared to a peak of 10% in 2021) and continue to bankroll household spending. On the corporate side, companies are awash with cash and, while margins are coming back down toward pre-Covid levels, they remain attractive. We prefer a balanced mix of Growth and Value stocks, and we are positioning portfolios for a broader market recovery.

UK. We remain Overweight the British equity market, which has put on 6% this year. This strong performance is explained by both the market's sector composition and a bullish profit outlook. Headline inflation has begun to drop significantly as the immense surges in energy costs in the wake of Russia’s invasion of Ukraine start to fall out of year-on-year figures. This relieves some pressures on fiscal policy as well as corporate and household spending and prompted the International Monetary Fund (IMF) to revise their projections and not expect a recession in the UK economy in the near future.

Europe. We remain Overweight Eurozone equities. Equity markets in the Euro area rose by almost 13% in the year to date, outperforming other big regions, and the outlook remains good. Unlike in the US, consumption continues to be held back by the erosion of purchasing power caused by still high inflation and modest salary rises. That said, service sector companies continue to plough ahead as margins remain healthy and companies still have ample cash reserves. Fiscal policy, most notably via the EU's NextGenerationEU programme, are providing further support for investment. The profit trend remains positive and should last for the next few months, sustaining the appeal of the region's equity markets.

Emerging markets. We move from Neutral to Underweight emerging market equities. The revival in China's economy since Covid restrictions were lifted has proved disappointing. Growth outstripped expectations in Q1 2023 but internal demand failed to keep pace, as was clear from the fall-off in imports during April. The Chinese stock market is down on the year, reflecting analysts’ downgrading of the country's economic prospects.

Style Preference

Earnings per share expectations for the next 12 months

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

End of the central bank tightening cycle near

Central banks are nearing the end of their tightening cycle. Interest rates are attractive, and we have recently increased the duration of our existing exposure to Neutral, closing out a favourable short-duration positioning now that yields have settled at an elevated level.

rates

US. Yields on US 10-year Treasuries have held steady at 3.5% to 4% all year, with an upside bias since the latest meeting of the Federal Reserve’s monetary policy committee on 11 May. At this meeting, committee members again voted to raise policy rates by 25 bps to 5-5.25%. This may well be the last rise in the current tightening cycle, which has set records for its speed and scale, and could herald a months-long pause. Indeed, while inflation confirms its downward trend, core inflation has remained stable for several months at a high level. Strong labour markets, with rising wages and above productivity gains, complicates the easing of price pressures. The Fed will likely await solid confirmation that underlying inflation is coming down before starting to cut rates. Overall, we remain Neutral on Treasuries on grounds of their attractive yields and protective characteristics.

UK. Gilt yields surged past 4.3% in response to the latest consumer price index readings. Inflation is still running high, with persistently strong pressures on food prices and salaries. Moreover, the economy is proving resilient, which has led the IMF to no longer predict a recession this year. In this context, to contain inflationary pressures, the Bank of England raised rates 25 bps to 4.5% in April and is not ruling out further hikes. We remain Neutral on our Gilt exposure, and have taken the opportunity to return to a Neutral duration positioning, moderately increasing portfolios’ sensitivity to changes in yields.

Duration Preference

Eurozone. Euro area sovereign bonds have also been largely stable since the start of the year. Bund yields have drifted between 2% and 2.5% and OAT yields between 2.5% and 3% with peripheral markets moving in the same way. The latest ECB meeting concluded with no surprises: a quarter-point rate rise to 3.25%-3.75%. Inflation readings surprised on the downside in May, dropping to 6.1% on the headline level from 7.0% the month prior. However, with core inflation remaining elevated at 5.3% and labour markets looking robust, the ECB has every reason to continue tightening, as markets expect. We remain at Neutral on Eurozone government debt.

CREDIT

Developed markets. Credit risk on high quality corporate bonds have abated from their latest surge during the banking jitters in March. Now that they have settled at an elevated level, Credit spreads (yield premia over equivalent risk-free government debt) look reasonably attractive, and we have incrementally added exposure while remaining Underweight overall. We also remain Underweight on High Yield debt to limit risk exposure to the most rate-sensitive corporate issuers.

Attractive rates for companies

Currencies

Positive momentum for European currencies

The narrowing gap between Fed and ECB/BoE rates means we continue to prefer the EUR and GBP.

Dollar Index. The US dollar has returned close to its early year level against the major developed and emerging currencies. With the Fed expected to pause its upward cycle at its next meeting the dollar should remain contained over the coming months.

GBP/USD. We remain Overweight sterling against the dollar. The pound has appreciated slightly since the beginning of the year. This trend should persist in coming weeks with the Bank of England braced to continue tightening monetary policy.

EUR/USD. We remain Overweight on the euro against the dollar also. The European currency has fallen slightly over the past month as tensions over US regional banks have eased but has remained broadly stable since the beginning of the year. Nevertheless, we think the euro has further to climb against the dollar as the gap between Fed and ECB rates narrows and Europe's balance of payments figures continues to improve.

JPY/USD. We remain Overweight on JPY/USD. The Japanese currency continues to decline against the dollar in a context of widening interest rate differentials. Indeed, Japan is maintaining its yield curve control regime for the time being, with the Bank of Japan maintaining a 0.5% cap on the 10-year JGB. Markets still expect a gradual exit from this regime, given that inflation in Japan reached 3.5% in April, that nominal wages are also starting to rise at a rate above 2%. Thus, there is little in the way of further downside potential for the yen.

EUR and GBP vs USD exchange rates

Emerging market currencies. Any underlying nerves among investors in emerging markets was amplified by President Erdoğan’s unexpected performance in Turkey’s election and the subsequent fall in the Lira to twenty to the dollar for the first time. Consequently, it offers a rationale for the soaring demand in gold as investors seek a safe-haven asset in turbulent times. This newfound demand for gold could prove to be pivotal for China’s strategy to internationalise the renminbi and challenge the historical strength of the dollar in the wake of its disappointing economic recovery.

ALTERNATIVES

Gold rush

We have moved to Neutral on Gold, taking advantage of strong price momentum since the beginning of the year. Hedge Funds may have lost some of their shine compared to the protective benefits of yield-bearing fixed income products, yet they remain a core pillar of our diversification strategy.

Commodities

Commodities. We maintain our Neutral position on industrial commodities. As for oil, the price per barrel remains under downward pressure due to subdued global demand, notably due to a disappointing economic recovery in China.

Gold. We are adjusting our gold position from Overweight to Neutral. An ounce of gold is currently trading at $1,975, testing its highest levels ever in nominal terms. Since the start of the year the price has risen by more than 8%, mainly as a result of continued strong buying by central banks and elevated levels of uncertainty. Now that we believe the time has come to take advantage of our Overweight position and we are taking profits by reducing our exposure.

Oil and Gold Prices

Real Assets

Infrastructure & specialist property. We hold an allocation to a diversified portfolio of infrastructure (such as energy storage and efficiency, smart grids, waste-to-energy, air treatment and digital infrastructure) and specialist property assets (including care homes and e-commerce and logistics warehouses). These real assets offer additional diversification from other risk assets such as equities, as well as an attractive income stream and reasonable sensitivity to inflation.

Hedge funds

Hedge Funds. In unstable market conditions hedge funds can help a portfolio, but selectivity is key. We prefer strategies which hold their own in bear markets, such as Merger Arbitrage, trend followers and Equity long/short. These strategies provide relatively safe, uncorrelated sources of returns from equities. Our hedge funds allocation has performed well over 2022 and have been a great diversifier in our strategies.

Tail Risk Protection Note. Tail risks are typically understood as unlikely but severe crisis events which shock markets and dramatically impact the value of risk assets negatively. The dot-com bust at the turn of the century and the Great Financial Crisis in 2008 and 2009 are examples of such events. Despite conditions not being favourable for it in 2022, we believe the Tail Risk Protection Note offers our portfolios yet another critical source of safety and complements the existing diversifiers.