Our Asset Allocation
in Detail

DISCOVER OUR ASSET ALLOCATION IN DETAIL

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Equity Markets

Broadly positive on developed equities

The prospect of lower corporate tax rates and deregulation in the US has encouraged us to strengthen our positive outlook on US equities. We also maintain a positive stance on European equity markets, favouring companies and sectors that are both exposed to US activity but with limited risks in terms of trade restrictions. On the other hand, there are risks for emerging equity markets, with China especially vulnerable to an escalating trade war.

US. Having experienced some rotation over the past month, US equity markets greeted the Republican victory with a strong rally. There is good reason to expect this to continue in the weeks ahead. Firstly, the prospect of a more expansionary fiscal policy (tax cuts) should benefit US companies. In addition, the pre-election economic context was already favourable, with a persistently strong economy, healthy household and corporate balance sheets, and declining interest rates.

Moreover, corporate profits are still rising strongly (by almost 7% year-on-year). We therefore maintain a positive view on US equities, and are favouring sectors and styles likely to benefit from the favourable industrial policy and that can withstand interest rates remaining somewhat higher than previously anticipated. Namely, these are value stocks, small- and mid-caps and sectors such as manufacturing and finance. With valuations in the US still on the high end of history, there remain risks, and we prefer to seek greater breadth away from the mega cap stock that led in 2023 and H1 2024.

Euro Area. European equities have also experienced considerable volatility over the past month. Reaction to the election results has been mixed. Nevertheless, they could also benefit from an expansionary policy in the US. The fall in the euro vs. US Dollar could also help exporting companies. In addition, the prospect of further rate cuts by the ECB could benefit the economy, and more specifically companies with high levels of debt. Lastly, the fall in inflation will restore purchasing power to households and breathe new life into the economy, allowing the rebound in corporate earnings to continue. We therefore maintain a positive outlook on European equity markets, but prefer sectors and companies less likely to suffer tariff hikes, including media, industrials, and materials, and companies that produce locally.

UK. UK equities have performed well over the past month, thanks to the rise in value stocks, despite the Labour government's decision to increase the minimum wage and employers' social security contributions. The UK market should benefit from the fall in inflation, enabling the Bank of England to lower its key interest rates further, albeit at a slow and moderate pace. Finally, similar to the euro area, the fall in the value of sterling versus the US Dollar and a heavy economic exposure to the US could, at least in the short term, favour UK companies. We therefore maintain a broadly positive outlook.

Japan. Having strongly outperformed the global market until mid-2024, the Japanese market has since fallen by 1.7%. A volatile yen, monetary policy that runs counter to the other main central banks and the heavy weighting of growth stocks seem to have turned investors against Japanese equities. Even so, we prefer to remain at Neutral on this market.

Emerging markets. Emerging markets have been penalised by developments in Chinese markets over the past month. The difficulties facing the Chinese economy persist, while authorities are still slow to take concrete measures. In addition, Trump's victory in the US has put the spotlight back on trade tensions between the two countries. Other emerging countries (Mexico, for example) could also be penalised by trade measures. We are therefore taking a more cautious approach to these markets..

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 10/11/2024 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 Markets

Caution in the short-term

Against a backdrop of persistent uncertainty over interest rates, we remain broadly neutral on bond markets. Bond markets will remain uncertain in the short term. The recent trend higher in bond yields (in the US but also Europe) could be prolonged given the risks of higher inflation due to Trump's anticipated policies. Although credit spreads are currently tight by historical standards, investment grade corporate bonds should remain in demand on the improving economic outlook.

UK. UK government yields also moved higher, with the 10-year gilt rising from 3.9% in early October to 4.6% by early November. As with euro bond yields, this increase reflects some contagion effect from the US, but also reflects the changed UK budget outlook, with more debt issuance than markets had previously expected.

We maintain a neutral stance on gilts, against a backdrop of moderate economic growth and expectations that the Bank of England should continue its rate-cutting path given the reduction in core inflation.

US. US government yields were erratic in October. The 2-year rate, which is a proxy of market expectations of the Federal Reserve's rate path over the coming months, rose from 3.6% at the start of October to 4.2% by the start of November. Markets are now anticipating fewer rate cuts in 2025, as compared with 6 months ago. At the same time, the 10-year Treasury yield rose from 3.7% to 4.3%, despite the Fed being on a rate-cutting path. Should inflation continue to converge towards the Fed’s target, we may see another cut of 25 bps in December. The rise in bond yields is explained firstly by the continuing strength of the US economy, with GDP still growing at close to 3% and a favourable outlook beyond. Secondly, the rise in yields coincided with an increase in the likelihood of Trump winning the presidential election, as his programme was perceived to be more inflationary given the increase in customs duties and an even more accommodating fiscal policy (tax cuts). The broad Republican victory should give Trump the latitude to implement the main lines of his programme, compelling the Federal Reserve to keep interest rates higher than previously anticipated. As a result, we are cautious on US Treasuries in the very short term, though continue to value them as diversifiers in portfolios.

Euro Area. Government yields in the euro area also rose in October in the wake of US yields. The 10-year German Bund rate rose from 2% at the start of October to 2.4% by the start of November. Sovereign spreads, which had been falling until the end of October, started to rise again slightly, with the Italy-Germany spread rising to 128 bps and the France-Germany spread to 77 bps. In our view, this upward movement in yields is more a reflection of contagion from the rise in US rates than from growing economic strength in Europe. While European growth remains positive overall, it is moderate in comparison to the US, with the outlook for Germany and France particularly sluggish. Moreover, inflation expectations in the euro area are trending downwards, with services inflation continuing to normalise. As a result, the ECB is likely to continue cutting its key rate, with a 25 bp cut in December, to bring the deposit rate to 3%. We therefore remain constructive on European government debt, and with a bias to increasing the duration of bonds held. The continuation of the rate-cutting cycle, together with disinflation and moderate growth, should keep European yields in check.

CREDIT

We see an improving outlook for highly rated credit. Although spreads are tight by historical standards, improving economic outlooks in each of the US, UK, and euro area suggests that investment grade corporate bonds will remain in demand. Corporate balance sheets remain solid, and yields remain attractive in real terms (after inflation).

Unless specified, all figures and statistics in this report are from Bloomberg and Macrobond on 14/10/2024, 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.

Currencies

The keys to a strong dollar

We expect the US dollar to remain strong against major currencies. The environment of higher growth, higher interest rates, and protectionist policies should keep the dollar well supported. Trump and the Republican party's sweeping victory in the Senate increases the likelihood that his agenda will be implemented. The highly protectionist nature of Trump's policies increases the risks for export-dependent economies, and hence the depreciation of their currencies. On the other hand, the more inflationary nature of the Republican programme increases the likelihood of higher inflation and hence the prospect of higher interest rates, also favouring a stronger dollar.

Dollar Index. The US dollar has appreciated sharply against most developed and emerging currencies in the run-up to and since the US presidential election. Among the emerging economies, the Korean won fell by 1.3% against the dollar and the Chinese yuan fell by 0.8% in the day after the election. These movements reflect fears of tariffs on their manufacturing exports. More surprisingly, the Mexican peso held steady against the dollar after the election, but this came after a sharp fall in Q3 2024.

EUR/USD. The euro is one of the currencies to have seen the sharpest depreciation in the wake of the US election, with the EUR/USD falling to 1.07 dollars per euro, a drop of -1.1%. This fall is explained primarily by the risk of customs duties on manufactured goods, given that several euro area countries have the United States as their main trading partner outside the euro area, and that several countries also remain dependent on exports as an engine of growth. Secondly, the prospect of a wider interest rate differential between the two regions due to different growth and inflation dynamics favours the dollar against

EUR/CHF. The Swiss franc remains at a historically high level against the euro, at 0.93 francs to the euro, yet we remain cautious on the EUR/CHF. Firstly, political uncertainty in Europe should benefit the Swiss currency, especially in an environment of major geopolitical risks. Secondly, although the Swiss National Bank is likely to continue its rate-cutting cycle (with the policy rate currently at 1% and inflation close to 1%), the rate differential between Switzerland and the euro area should remain stable. Finally, Switzerland's large current account surplus (7% of GDP) should also support CHF.

the euro. Against this backdrop, we are taking a more cautious outlook for EUR versus USD in the short term.

GPB/USD. We are similarly more cautious on our outlook for GBP versus USD. At time of writing, the pound is hovering lower, at $1.29. The UK is also likely to be affected by a rise in US tariffs, as the US is the UK’s biggest market for exports. Furthermore, like the euro area, the interest rate differential between the US and UK is likely to shift in favour of the dollar.

USD/JPY. The Japanese currency suffered the same treatment as the other developed currencies, falling by 1.2% to 153 yen to the dollar. The US accounts for almost 20% of Japanese exports, which also makes it vulnerable to a general rise in customs duties. The new interest rate outlook in the US is also penalising the yen, against a backdrop where the Bank of Japan's monetary policy is likely to be gradually normalised as core inflation remains at 2%. We are therefore upgrading our position on the USD/JPY exchange rate, in line with other developed currencies against the dollar.

Alternatives & Thematics

Underweight on hedge funds reinforced; move to neutral on gold

High interest rates continue to make hedge funds less attractive, while uncertainty continues to favour gold. In terms of themes, we remain exposed to Artificial Intelligence and European Excellence, as well as to reshoring and innovation in healthcare, and are proposing solutions to play the economic slowdown and interest rate cuts.

Commodities and gold

Commodities. Once again, oil has been one of the most volatile assets this month, fluctuating between $70 and $80/b. With a performance of -6% over the month, oil is still suffering from concerns surrounding weak activity in China (fears heightened by the prospect of higher US tariffs). High volatility is set to continue in the months ahead, with OPEC supply still abundant and geopolitical tensions ongoing.

Gold. Gold's status as a safe-haven asset means that geopolitical uncertainties continue to play a key role in its price. Continued rate cuts by the main central banks are also boosting gold's appeal, as are fears about international activity caused by prospective increases to tariffs under Trump. This is significant given that China and several other emerging market central banks are major buyers of gold. We also acknowledge that demand for gold may continue to persist for longer than previously anticipated, despite lacking any real yield or similar fundamental appeal. With a fall of more than 4% over the week of the US election, it is a reasonable time to consider gold for diversifying a portfolio.

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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. High interest rates and a shortage of liquidity continue to discourage firms from embarking on mergers and acquisitions. However, they ultimately stand to benefit from lower interest rates and a more laissez-faire approach to mergers in the US under Trump.

Fixed Income Arbitrage. Some sovereign bond funds could benefit from continued uncertainty over interest rates. We retain our relative interest in funds positioned in the credits segment.

Global Macro/CTA. Commodity Trading Advisors (CTAs) funds are generally useful for protecting against market volatility, however, will typically suffer under sharp reversals in markets.

Themes

Current themes: Artificial Intelligence stocks should continue to perform well, given the maturity and potential of AI and the strong profit growth of companies in the sector. The Reshoring theme should get a boost as industrial policy comes back into fashion in the West. To cash in on a combination of bullish factors – falling inflation, cuts to ECB rates, and attractive value – we are playing the European Excellence theme via international companies that are leaders in their respective markets. Finally, Health Innovation should benefit from an ageing population, changing lifestyles, technological progress, and modest valuations.

New theme: The combination of a slowing economy and falling policy rates should be good for strategies that focus on value and defensive sectors rather than growth stocks. High-dividend stocks also stand to gain, particularly those with an established track record of dividend yield payments. Safe-havens that are undervalued as well as fixed-income assets are other potential winners from the downward leg of the rate cycle.