Our Asset Allocation
in Detail

DISCOVER OUR ASSET ALLOCATION IN DETAIL

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Equity Markets

We remain Overweight on European equity markets

Global stock markets have been highly volatile since the start of Q3. On one hand, stock prices have been held back by political news-flow, including French elections and the US campaign, plus signs of weakening economic activity. On the other, central bank rate cuts and announcements of a new stimulus package in China were welcomed by markets. As for the United States, the economy may be robust, but we prefer to remain Neutral on US equities given the upcoming Presidential elections. We remain Overweight European equity markets, partly because they look attractively priced.

US. US stock market performance since the start of Q3 was broadly in line with the global index (up 6.2% each), despite the summer’s large correction. However, there has been some rotation in investor preferences for style and market cap: value stocks and small caps have substantially outperformed. This broadening of performance, coupled with a robust economy and Fed rate cuts, should be good for US equity markets. What is more, company profits are on the rise, whether measured at macro-level (in the national accounts) or micro-level (earnings). However, the United States market looks expensive whether in absolute terms (P/E) or relative to government debt (equity risk premium). Further, the presidential and legislative elections scheduled for 5 November could lead to a difficult and uncertain political outcome, likely to foster more volatility.

Euro Area. European equities have substantially underperformed since the start of Q3, gaining only 1.9%, held back by economic problems, notably in Germany, political uncertainty in France and lacklustre corporate earnings. We nonetheless remain Overweight on these markets, which are still cheap in absolute terms. Moreover, while earnings growth may be on a downtrend, profit margins remain historically high and net debt (debt minus bank deposits) is back to the levels not seen before the financial crisis. Finally, although growth is set to stall briefly in late 2024, it should bounce back in 2025.

UK. Like the euro area, UK equity markets underperformed the global index since Q3, putting on 1.9%. However, we are keeping our Overweight to this market which remains one of the cheapest on offer. Falling interest rates and the return of some political stability should also be good for UK stocks. The London market has a high share of value stocks, and this could also prove helpful in a context of equity market style rotation.

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. A 23% surge by Chinese stocks since the start of Q3 helped emerging markets outperform the global index. Much of the performance was attributable to China’s announcement of a fresh stimulus package. The Chinese market had been one of the world's cheapest but is now trading in line with its long-term average. We remain Neutral on EM equities given concerns around their heavy tech bias, looming geopolitical risks and the risk of Chinese market correction after its recent rally.

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.

Fixed Income Markets

We remain constructive on bonds

We remain Neutral on fixed income products. Central banks have confirmed rates are heading downward as inflation continues to fall and the job market comes off the boil in the US. In Europe inflation is also falling and the economy is weak. We keep our fixed income position unchanged, to play the still attractive carry offered by bonds and, once again, to hedge against possible stock market volatility. We also remain Neutral on corporate bonds, which stand to benefit from the rate cutting cycle and are backed by robust corporate balance sheets.

US. US sovereign bond yields have been on a downtrend since the start of Q3. The 2-year bill – a proxy for where the market thinks the Fed funds rate will be one year out – ended the quarter at 3.6% while 10-year T-bond yields came down to 3.8%, although they spiked above 4% in early October. This decline basically reflects the beginning of the Federal Reserve’s (Fed’s) rate cut cycle and the likelihood of more cuts to come at upcoming meetings. The Fed has now brought rates down by 50 bp from their peak to 5%, with inflation now nearing its 2% target and the jobs market showing signs of slowing. Unemployment has ticked up to 4.1% from 3.7% at the start of the year. With inflation homing in on its target and a modest slackening of the jobs market, we expect the Fed to cut policy rate by a further 50 bp before the end of 2024. We remain Neutral on Treasuries. Bond yields may rise further in the short term, driven by geopolitical risks in the Middle East and their potential impact on oil price. Nonetheless, there is still good real-terms carry on offer.

Euro Area. Euro area sovereign bond yields are also trending down. German 10-year bund yields ended the quarter at 2.1% while the French 10-year OAT slipped to 2.9% – as with US yields, there was a small uptick at the start of October.

Bond yield spread also generally narrowed over the quarter, the exception being France, whose spread widened by 77 bp amid political uncertainty and fiscal slippages. The slide in yields primarily reflects the European Central Bank's (ECB) plans to continue cutting rates. The deposit rate has already come down to 3.5% and we expect two more 25 bp cuts in 2024. The secondary factor is Europe's weak economy which, coupled with an accelerating decline in inflation, has helped drive the fall in sovereign bond yields. In these circumstances we remain at Neutral on these assets.

Short term, we are likely to see yields fluctuate in line with the oil price but given the generally weak economy and further ECB rate cuts in the pipeline we stand by our Neutral exposure to European sovereign debt.

UK. We also remain Neutral on gilts, with a preference for long duration. Yields on 10-year gilts also fell in Q3 2024, to 4%. UK inflation is proving sticky, and the Bank of England remains the most cautious of the major central banks when it comes to policy easing. Markets are pricing in only one or two more 25 bp rate cuts in 2024.

CREDIT

We remain Neutral on both investment grade (IG) and high yield (HY) corporate debt. Performance remains impressive, particularly among HY bonds which have achieved a total return of over 5% this year. With rates now coming down and company balance sheets still looking solid, we maintain our exposure to corporate bond markets.

Currencies

Neutral on US dollar

We remain Neutral on the dollar against both the euro and sterling, in a context of synchronised rate cuts and US economy outperformance. We also remain Neutral on USD/JPY, in light of the gradual normalisation of Japan's monetary policy. We remain Underweight EUR/CHF. The Swiss franc can still count on a solid balance of payments and as a safe-haven currency stands to gain from heightened geopolitical risk.

Dollar Index. The greenback lost ground against major developed and emerging market currencies in Q3 2024, though the decline eased off in early October. Amongst EM currencies, China's renminbi (RMB) gained most against the dollar in the last three months, rallying 2.8% on news of a major stimulus package in China and cuts to Federal Reserve (Fed) interest rates in the US. In contrast, Latin-American currencies fell sharply against the dollar over the quarter. The Mexican peso lost nearly 9% of its dollar value as investors worried about economic and institutional reforms.

EUR/USD. Europe's single currency rose against the dollar in Q3 2024, ending the quarter at EUR/USD 1.12, though these gains were then partly eroded by movements in sovereign yields. The euro's strength basically reflects the Fed's launch of its rate easing cycle with a 50 bp cut at its September meeting, while the European Bank continued to strike a more cautious tone. That said, the Fed is likely to look at the resilient US economy and decide to slow down the pace of its rate cut cycle at future meetings, while the ECB, looking at a firm disinflation trend and a weak economy,

GBP/USD. We remain Neutral on GBP/USD. Like the euro, Sterling made substantial gains against the dollar in Q3, rising 6% and then dipping slightly since the start of October. This strong performance by the British currency is mainly due to the transatlantic rate gap. While the Fed surprised markets with a 50 bp rate reduction, the Bank of England continues to sound cautious on the timing of its rate cuts in an economy where inflation is proving slower to come down. We, however, think the Bank of England could shift its tone and put through some deeper-than-expected rate cuts, which is why we remain at Neutral on this cross.

should maintain the pace of its cuts. In these circumstances, we have opted to remain Neutral on EUR/USD.

USD/JPY. The Japanese yen continues to go up and down like a yo-yo. Having surged by 14% between July and mid-September it dropped sharply to USD/JPY 148. The Bank of Japan is continuing its slow march toward normalisation of monetary policy amid a stagnant economy and underlying inflation near its 2% target. Meanwhile the Fed is set to keep cutting rates, albeit at a slower pace than previously. Accordingly, we remain Neutral on USD/JPY.

EUR/CHF. The Swiss franc continues to rally against the euro, rising by nearly 4% in Q3 to EUR/CHF 0.93. We remain Underweight this cross. Political uncertainties in Europe should be positive for the Swiss franc, particularly given the global geopolitical risks. Also, Switzerland's heavy balance of payments surplus should help the franc.

Alternatives & Thematics

We keep our Underweight to gold and hedge funds

High interest rates tarnish the appeal of hedge funds and gold. In terms of thematics, we keep our exposure to Artificial Intelligence, European Excellence, Reshoring, and Health Innovation. We have also added solutions to play the economic slowdown and rate cuts cycle.

Commodities and gold

Commodities. Having hit a three-year low of USD 69/bbl early September, the oil price bounced back strongly mid-month to briefly top USD 80/bbl. Driving the rebound was the latest stimulus package by the world's biggest oil importer, China, and supply side fears following the rise in tensions in the Middle East, home to half the OPEC member states. Crude prices are likely to remain volatile as the tug-of-war between plentiful supply and geopolitical tensions plays out.

Gold. Gold has always been seen as a safe haven in troubled times and the current uncertainties stalking the world have helped push the gold price to its latest historical high. The first-rate cuts by the major central banks further stoked the appetite for gold, notably among emerging market central banks. However, gold pays no income, and we still prefer yielding and/or riskier assets in what is still a favourable global economy.

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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 at 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. However, they ultimately stand to benefit from lower interest rates.

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

Themes

Current themes: Artificial Intelligence, Reshoring, European Excellence and Health Innovation. 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 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 cheap valuations.

New theme: Playing the slowing economy and rate cut cycle. 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.