Asset Allocation amid economic uncertainty
The strong performance of many assets over the last four month and our growing concerns about the state of the global economy led us to expect lower returns and spread risks within our Model Asset Allocation.
As a result, we’re reducing our allocation to investment grade (but remain Overweight), high yield (to Underweight) and equities (to further Underweight), while boosting cash (to Overweight) and bank loans (to further Overweight). To balance our conservative approach, we’re maximising our exposure to commodities, which have been underperforming.
There are several questions being asked about the many economic and geopolitical factors in play now or that will feature in coming months: What is the outlook for growth? When will central banks start cutting interest rates and what will happen when they do? What is priced into markets, do bubbles exist and do the outcome of US elections matter for financial markets?
Given all the uncertainty, we’ve decided to spread risk away from outperforming assets towards more defensive choices. Even if economic performance improves, we believe a lot of good news is priced into some assets.
Western central banks will start cutting rates in the coming months, with 100-150 basis points of cuts possible in the next 12 months. We think a lot of this is already priced into the long end of yield curves, though there may be some short-term downside if the US economy weakens in the first half of 2024, as we expect. In this case, we believe that yield curve steepening will largely be the result of falling short rates and we are less attracted to long duration assets than we were four months ago.