Shifting Markets

Shifting Markets



Our portfolio positioning

We are starting 2023 with a combination of equity and fixed income exposures. These positions reflect our outlook for markets over the next 12 months. However, we are mindful that the investment environment is an evolving one and conditions can soon change. So, we are ready to adjust our positioning if our views on the economy and monetary and fiscal policies change.

Moving the dial on risk
What would it take for us to increase and reduce risk more generally in portfolios? All else being equal, here’s what we’d do:
  • Increase risk if inflation, interest rates and bond yields fall more rapidly than expected, the Ukraine War ends, or China reopens quickly.
  • Decrease risk if central banks overtighten monetary policy, there’s a further inflation spike due to energy and wages, or – apart from an always possible black swan – the tensions between Russia and Ukraine and/or China and Taiwan deteriorate.
Not time to re-risk yet
Our overall equity exposure is still slightly underweight. Although stock markets picked up at the end of 2022, we do not think it is yet the time to increase exposure to risk in our portfolios.

Our positions:
  • Maintaining our marginal equity underweight, alongside an increased bond exposure, which should protect our portfolios if equity markets sell off.
  • Retaining a higher weighting in US equities as a higher-quality market and emerging market equities as an attractively valued market where earnings expectations have corrected significantly.
  • Maintaining our conviction that euro area equities are yet to suitably adjust to deteriorating economic conditions either in corporate earnings or prices.
  • Adjusting our equity exposure to diversify from quality growth to factors we find compelling, such as high-dividend and low-volatility equities.
  • Watching for key catalysts to dial risk up or down in portfolios.
Not time to re-risk yet
Corporate bonds: add high-quality, reduce low-quality
Our exposure to corporate bonds is neutral after being overweight previously.

Our positions:
  • Increasing our exposure to euro area and UK investment grade bonds. These offer good value now that inflation, from an elevated level, may be easing and central banks are likely to stop hiking rates from the spring.
  • Reducing our exposure to US investment grade and high yield bonds because we believe these markets still don’t reflect the associated risks.
  • Maintaining our higher exposure to emerging market hard currency debt as the additional yields on offer compared to developed market government bonds are attractive.
Corporate bonds: add high-quality, reduce low-quality
Government bonds
Government bonds
We have increased our overall government bond exposure to reflect our views on the global economy, moving from underweight to overweight. We expect further declines in bond yields over the course of 2023 as inflation continues to decelerate and market expectations shifts towards central bank rate cuts.

Our positions:
  • Increasing US Treasuries as yields have peaked and there are more signs that inflation, while still elevated, is starting to decline.
  • Increasing euro area and UK government bonds, as we previously owned very little. We want to get to a more ‘normal’ exposure in expectation that inflation and central bank rates peak and come down in these regions too, also aided by recession.
Government bonds
Cash & gold
Reduce dollar cash, keep gold as a diversifier
Peak rates suggest the dollar may benefit less from here – as the Federal Reserve is no longer outpacing other central banks. This takes away a key driver of past dollar strength. A less risk-off environment as the year progresses should also contribute to some moderate dollar weakness.

We believe Gold could benefit a bit from peaking real rates (nominal interest rates adjusted for inflation), but this peak isn’t yet around the corner. When it comes, we suspect the peak in real rates is unlikely to be very strong – at least initially.

Our positions:
  • Reducing US dollar exposure as we expect it to weaken slightly this year.
  • Maintaining our allocation to gold as a strategic hedge.
Reduce dollar  cash, keep gold as a diversifier