A new market cycle

A new market cycle

OUR FLAGSHIP PORTFOLIO POSITIONING
A new market cycle
Our flagship portfolio positioning
We have made two key calls heading into the second half of the year: increasing exposure to US investment grade bonds (hedged) and European minimum volatility stocks.

Our increased US investment grade (hedged) bond exposure has been funded by a reduction in our exposure to European and UK investment grade bonds. This slightly increases our sensitivity to interest rate changes, as we have stronger conviction that Fed rates have peaked and we’re positioning for falling bond yields in the US. 

Our analysis suggests that the outlook for continued outperformance of Eurozone equities is likely to become more challenged. However, there are risks in the US market given stretched valuations and our belief that expectations of Fed rate cuts are too optimistic. We see European minimum volatility stocks as a way of increasing our exposure to the Eurozone and allowing us to diversify away from the US, while keeping our slightly reduced exposure to equities unchanged. By investing broadly into Europe (rather than just Eurozone equities), we are positioned to capture any continued upside in Eurozone equities while mitigating the risks of a downturn through wider regional diversification and a focus on defensive sectors and companies.

Equities
Not time to re-risk yet

Our overall equity exposure is still marginally reduced vs our strategic (long-term) asset allocation. Although stock markets have performed relatively well this year, we do not think it is yet the time to increase exposure to risk in our portfolios.

Our positions:

  • Maintain preference for Asia-Pacific including Japan equities.  We maintain our increased Asia-Pacific & Japan allocation within our overall equity positions as reopening in China and Japan continues, valuations are attractive, prospects for an earnings-led recovery more credible and inflation dynamics in China allow for a continuation of supportive central bank policies.
     
  • Reshuffle our developed market equity exposure. We reduce our exposure to US equities to slightly below average, given the solid performance year-to-date allowing to lock-in some of these gains and optimistic pricing of Fed rate cuts. We increase defensive (minimum volatility) pan-European equities, which could outperform if we see a spike in volatility or a downturn.
Not time to re-risk yet
Credit
Add high-quality, reduce low-quality

We maintain a slightly cautious stance on credit, mainly the US high yield market, where banking-sector stresses, tighter credit standards and rate rises will likely be most acutely felt.

Our positions:

  • Increase exposure to US investment grade bonds (hedged) to neutralUS investment grade look set to benefit from the US Federal Reserve likely pausing its interest rate hiking cycle before the European Central Bank and the Bank of England.
     
  • Reduce our exposure to Eurozone/UK investment grade bonds to neutral. Our expectation that the European Central Bank and the Bank of England will likely deliver extra rate hikes make us more cautious.
     
  • Maintain our reduced exposure to US high yield bonds (hedged). The fast-paced tightening of credit conditions, rising default rates and the impending debt maturity wall for 2023 should exert further pressure.
Add high-quality, reduce low-quality
Government bonds
Stay constructive as rates peak
We maintain our increased exposure to high-quality government bonds, particularly in the US where a pause in interest rate increases alongside recessionary pressures should be supportive.
 

Our positions:

  • Maintain above-average exposure to US Treasuries (hedged). We think valuations are attractive, especially given our belief that interest rates have likely peaked in the US.
     
  • Maintaining exposure to Eurozone and UK government bonds.  We have a neutral exposure to Eurozone and UK government bonds as we view the inflation fight continuing.
Stay constructive as rates peak
Cash and gold
Keep unchanged as strategic diversifiers

We maintain our local cash balances and continue to hold gold as a strategic hedge at a neutral level relative to our long-term allocation.

Our positions:

  • Maintain local cash balances. We think a neutral allocation vs our strategic asset allocation makes sense at this stage as our moderate defensive positioning is expresses via owing more government bonds than average.
     
  • Maintaining our allocation to gold. We think the amount we have, which is in line with our long-term asset allocation, is about right as a strategic hedge.
Keep unchanged as strategic diversifiers
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