Our Asset Allocation
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EQUITIES

Overweight US and European equity markets

Equity markets continued the rally that took off in late 2023, driven by AI stocks. Despite high valuation levels in some markets, strong corporate earnings should continue to support European and US equity markets on which we remain Overweight. We maintain our Underweight position on emerging markets as the Chinese economy continues to stutter.

US. The United States market, powered by the “magnificent 7” tech stocks, continued its bull run, gaining 3% month-on-month, 8% year-to-date and 30% year-on-year. Corporate results have been solid, with profits rising an average 7%. This has left stocks looking expensive in both absolute terms and compared to bonds. Cyclical and growth sectors valuations (particularly techs) are at record highs in absolute terms. That said, momentum - measured as the 20-day moving average - and sentiment are still bullish for both these sectors and for the wider market. We therefore stand by our Overweight to this market. We are also maintaining our exposure to growth stocks in our investment themes, particularly AI (see Alternative & Thematics section).

Euro Area. European equities outperformed last month, gaining 4% vs. 3% for global markets. We see them continuing to ride a fair wind based on attractive multiples (in absolute terms) and strong market momentum. Also, economic data have been surprising on the upside, suggesting the euro area economy could rebound in 2024. Lastly, the European Central Bank (ECB) expected rate cuts could help bolster corporate margins in the second half of the year.

Style Preference

UK. The UK market once again underperformed in February, up 1.5% on the month but unchanged since the start of the year, mainly due to its heavy bias toward energy and value stocks. Nonetheless, we remain Overweight local stocks which, as in the euro area, stand to benefit from strong market momentum, cheaper multiples, and the prospect of rate cuts.

Japan. The Japanese market continued to outperform, putting on 7% on the month and 40% year-to-date, thanks to a growing economy, low interest rates and heavy exposure to tech stocks. That said, prices and market sentiment both seem overly exuberant. We therefore remain Neutral on the Japanese market.

Equity markets: Price Earnings Ratio

Emerging markets. Following a rebound by Chinese markets which gained 4% on the month, emerging market equities did rather well in February, albeit not quite as well as their peers. In the absence of major stimulus packages for the ailing property sector, China's economy is likely to remain vulnerable, keeping a lid on local equity markets. We thus remain Underweight on emerging market equities.

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

Staying Neutral

We remain constructive on fixed income. Carry remains attractive, and the looming gradual rate cut cycle should support bond valuations. We remain Neutral on both government bonds and IG credit but remain Underweight high yield.

SOVEREIGN YIELDS

US. US sovereign yields have moved little in the past four weeks, with the 10-year bond yield fluctuating gently around 4%. Q1 economic data show both the economy and jobs market holding up well. Meanwhile, headline and underlying inflation continued to slowly converge toward the Federal Reserve’s (Fed's) 2% target – at 2.4% and 2.8%, respectively, in January – although the services component remains on an above-target trend. Against this backdrop, the Fed confirmed it was planning to cut rates over the 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 the expected end of quantitative tightening. However, a robust economy and labour market, coupled with sticky inflation, should limit any decline in long bond yields over the coming months.

Euro Area. Sovereign yields are on the upward trend in the euro area, with the 10-year bund and OAT hovering around 2.3% and 2.8%, respectively. Yields on peripheral debt continue to strengthen, with the Italian spread over Germany narrowing to 130bps.

Duration preferences

Given the still tight labour market and strong wage growth, the ECB kept its deposit rate unchanged at 4% and stuck to its balance sheet reduction path. During the press conference, ECB President Lagarde opened the door to a first rate cut in June as long as core inflation is on a clear track toward its 2% target. We remain Neutral on euro area sovereign debt given the expected cautious monetary easing and its synchronisation with the Fed’s.

UK. Gilts have been broadly stable around 4% since the beginning of the year. The economy remains weak but inflation is more of a worry than in continental Europe. Aware of this, the Bank of England is expected to hold rates at 5.25% for the next few months and we are therefore maintaining our Neutral position on UK debt.

CREDIT

Developed Markets. We remain Neutral on investment grade (IG) credits, whose 4% carry rate remains attractive amidst healthy corporate balance sheets. We retain our Underweight to high-yield (HY) credit given high valuations and higher risks as companies in this category are naturally more leveraged than in IG.

Central banks key rates and market expectations

Currencies

Neutrality on US dollar

The US dollar lost some of its January gains in February. With central banks set to synchronise rate cuts we remain Neutral on the EUR/USD and GBP/USD.

Dollar Index. Having been markedly up since end-2023, the dollar fell back last month against developed and emerging market currencies but remains above its historical average.

EUR/USD. Europe's single currency gained 1.5% against the greenback last month to end at EUR/USD 1.09. The United States still has better growth prospects than Europe but recent economic releases in the euro area have surprised on the upside, helping weaken the dollar's euro cross. Moreover, the euro has benefited from lower risk aversion. However, we remain Neutral on the EUR/USD, as yield spreads should remain stable given synchronised monetary policies and the euro area’s external balance surplus should continue to support the euro.

GBP/USD. Like the euro, sterling appreciated against the dollar last month, gaining 1.5%. This reflects market expectations that the Bank of England will be keeping monetary policy tight for a while yet, given the United Kingdom's higher inflation. We remain Neutral on sterling against the dollar, expecting little change in the monetary policy spread.

USD/JPY. The yen finally broke its months-long bear run against the dollar, recently reaching USD/JPY 147.1. Past losses were driven by the Japanese central bank's highly accommodative rate policy, which is likely to change soon. However, we remain Neutral on the cross. Japan’s current account surpluses will help buoy its currency while the Fed is bracing for the start of its rate-cutting cycle.

EUR/CHF. The euro rallied against the Swiss franc to end the month at EUR/CHF 0.9619, thanks in part to the Swiss central bank's interventions on foreign exchanges. We remain Underweight on this cross as the franc-supportive factors (low inflation, strong current account surplus, safe-haven status) continue to persist.

EM Currencies. Emerging markets’ currencies rallied against a weakened dollar last month, benefiting from lower risk aversion and rate cuts prospects. The dollar lost 1.6% against the Mexican peso and 1% against the Brazilian real, in part due to attractive carry and improved external balances in these countries. Most Asian currencies remained stable against the dollar. The only currency that showed a large move against the dollar is the Egyptian pound, losing 37% of its value against the dollar after Egypt's central bank adjusted its peg against a backdrop of external liquidity crisis in Egypt.

USD vs. main currencies (100= - 1 year)

ALTERNATIVES & Thematics

Maintaining under-exposure to gold and to Hedge Funds

High interest rates continue to undermine the appeal of hedge funds and gold in our view, despite their recent strong showing. Theme-wise, we are sticking with artificial intelligence and clean energy.

Commodities and gold

Commodities. Brent crude prices made up some lost ground last month, adding 6 to USD 83.5/bbl after producer countries said they would further trim output. Prices are, however, being held in check by weak global demand. In Europe, natural gas prices remain under pressure from weak demand and high inventories, falling by more than 6% in February.

Gold. Gold hit a record high of USD 2,150/oz during the month as central banks pushed back the timing of rate cuts and investors moved back into gold in response to the high price of risky assets and geopolitical threats.

Main Commodity Prices (100 = 01/01/2023)

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Hedge funds

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. But their recent performance has left them looking insufficiently attractive in our view.

Themes

Artificial intelligence (AI). 2023 was the breakout year for AI-related stocks and 2024 continued the strong trend. The “magnificent 7” of Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla have gained nearly 14% this year on top of their 100% rally in 2023. We think these tech stocks will continue to perform, given AI’s early stage of maturity and massive potential, and the strong earnings growth among companies with a stake in this story. We therefore remain exposed to the AI theme.

Clean Energy. We use this theme to invest in companies that will benefit from the energy transition and the migration to a carbon-zero economy. The theme can expect ongoing support from several factors: government intervention via both budget incentives and regulation, upcoming rate cuts benefiting capital-intensive firms, and widening margins as production costs come down. That said, the theme underperformed in 2023 and has continued to do so this year.