Back to neutral

Welcome to the September edition of InView: Monthly Global House View. In this publication we consider significant developments in the world’s markets, and discuss our key convictions and themes for the coming months.

The global equity market rally continued in August, with the MSCI World All Countries index rising 2.6% in the month, to bring performance for the year-to-date to a solid 16.3%. This is despite a surge in volatility in the first few trading days of August due to increased fears of a US recession and adjustment to the further normalisation in Japanese monetary policy. However, that selloff was short-lived, although should be viewed as a warning of how markets can react to unexpected news flow. The sudden increase in market volatility together with persistent geopolitical tensions and expectations of imminent monetary policy easing supported the extension of the gold price rally.

Increased evidence that inflation is trending towards target leaves ample room for monetary policy to respond to downside risks to the economy, as highlighted by Federal Reserve Chairman Jerome Powell in his comments at the Jackson Hole Economic Symposium for central bankers in late August. However, other central banks, including the European Central Bank and the Bank of England, have so far warned of the risks of loosening policy too quickly. This was reflected in a more pronounced decrease in government bond yields in the US than in Europe, which triggered a broad-based depreciation of the US dollar.

Investors’ concerns regarding the risk of recession look to be overdone, at least in the short-term. With more than 200 basis points of easing by the Fed already priced in by the end of 2025, the scope for long-dated bond yields to fall much from the current levels is limited.

In such a context, it seems appropriate to adopt a neutral allocation to equities and fixed income assets in a balanced portfolio. Furthermore, adding to cash at the expense of alternatives will facilitate exploiting any market correction ahead of the November US elections. Within equities, an underweight to the US market is preferred, with better opportunities available in Europe, the UK and emerging Asia. In fixed income, the preference remains with high quality assets, including government and investment grade corporate bonds, while keeping the overall duration exposure at neutral.

Asset Allocation

Global Allocation

Currently, there are eight rate cuts from the Federal Reserve priced in between now and mid-2025, which, if implemented, would bring the Fed funds rate to around 3.25%-3.50%. With rate expectations consistent with a soft landing and economic surprises at a trough, our fixed income overweight no longer appears as compelling. As a result, fixed income exposure should be reduced back to a neutral level, also reflecting the strong rally that we have seen in recent weeks. In addition, we are continuing to take down our equity exposure, taking it to neutral. Global equity markets have had a solid run so far this year and so we are taking the opportunity to take some profits. These two reductions mean that cash levels can be increased, moving from underweight to overweight. Risks are still prevalent in the market such as in connection with the US elections, upcoming Fed meetings and ongoing macro uncertainty associated with rising unemployment and slowly declining inflation. This mixed picture is consistent with the need to raise cash and retain liquidity to take advantage of any increase in volatility.

Fixed Income

Of the changes made within our fixed income exposure, hybrid bonds are being increased to a neutral position versus the benchmark. This is to reflect improved conditions for financials, with banks seeing a better environment due to a steeper yield curve. This upgrade should be funded by a reduction in the allocation to local currency emerging market bonds, bringing it back to a neutral position. EM local currency technicals remain subdued and we look to take recent profits from a strong rally. While duration was increased to a 1-year overweight over the past few months, given interest rate expectations for the Fed as well as the strong rally in fixed income, we now see it as appropriate to reduce duration back in line to a neutral positioning.

Equities

No significant changes are being made to the equity allocation this month. In the US we remain underweight, reflecting idiosyncratic risk around the upcoming presidential election, interest rates and tech mega-caps. The overall Asia ex-Japan allocation was left unchanged, but with some country weighting adjustments. In India, we are taking profits as valuations are looking a bit extended although the long-term story remains intact. Despite fundamentals being strong and companies in India performing well during the August sell-off, valuations warranted a reduction. We will use this as an opportunity to add to Taiwan to take advantage of the pullback but will remain underweight. Our equity valuation model shows Europe and UK markets as the cheapest and we continue to favour these regions.

Equity Sectors

Equity Sector Views

UK

We continue to see an opportunity for the outperformance of UK midcaps over the coming quarters, reversing a multi-year period of underperformance through high inflation and interest rates as both of these factors normalise. Information technology has been a sector in which we have initiated several new positions recently that fit this theme, and for which we have found specialist UK companies trading on attractive valuations backed by strong structural tailwinds.

The industrials sector remains a key overweight within our UK exposure. We took advantage of the de-rating seen across the sector to pick up high-quality companies with resilient earnings at more attractive valuations last year, and have more recently been adding to cyclical areas within the sector as the macroeconomic outlook has continued to improve.

This view has also been a significant contributory factor in our decision to increase our exposure to utilities, given our view that declining bond yields providing support for the sector. Furthermore, regulatory uncertainty has recently taken a back seat with clarity provided over windfall taxes, and earnings will be further supported by the large amount of capex required in grid infrastructure over the coming years needed to meet climate targets.

US

Our view on the information technology sector is unchanged and within it, the risk/reward ratio for the “Magnificent-7” group of tech heavyweights now looks more balanced given their recent underperformance. We continue to like secularly growing segments such as public cloud, digital advertising and life science tools. We will increase exposure to REITS as the sector looks more attractive in our view given interest rate expectations, strong technicals and contrarian sentiment. This should be funded by a reduction in the exposure to industrials, which helps to reduce cyclicality.

Europe

Materials exposure is being reduced back to neutral to reflect the slowdown in China and the potential for over-supply. Profits should also be taken on communication services. However, we would still favour an overweight position versus the benchmark. In contrast financials exposure should be increased in our view, buying into the pullback although still remaining underweight. We now have a neutral view on consumer discretionary, having been underweight, buying into the correction seen within luxury owing to valuation and interest rate expectations.

Alternatives

No changes are being made to our alternatives exposure, having last month marginally decreased commodity exposure further underweight while balancing it out with an increase in hedge funds to a neutral position. We still view it as too early to invest in more cyclical commodities, with gold remaining our only exposure. Within hedge funds, we prefer commodity trading advisor (CTA) strategies owing to defensive attributes as well as discretionary macro managers, while being more neutral on both equity and credit long-short managers. Insurance positioning remains overweight versus the benchmark, with our exposure being a useful portfolio component given its uncorrelated nature.

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