Global Asset Allocation: The View From the UK

1. Market Perspective

• The global growth outlook remains positive against a backdrop of gradually easing inflationary pressures across most economies.
• US growth continues to be resilient, buoyed by a strong consumer, while optimism around European growth is building. Japanese growth remains challenged, and in China, there are signs that policy support is helping stabilise the economy, although risks remain. The UK economy expanded by a stronger-than-expected rate in the first quarter of 2024, exiting a recession that started in the second half of last year.
• The US Fed is still looking towards rate cuts this year, but sticky inflation and resiliency in the economy have tempered expectations. Meanwhile, the European Central Bank (ECB) appears closer to easing given progress with inflation. After hiking in March, the Bank of Japan (BoJ) continues to assess further hikes. The Bank of England (BoE) indicated that it could ease policy as soon as June.
• Key risks to global markets include a retrenchment in growth, stubborn inflation, volatility surrounding central banks’ policy divergence, geopolitical tensions and the trajectory of Chinese growth.

2. Portfolio Positioning

As of 30 April 2024

• We remain modestly overweight equities, supported by resilient economic growth, positive earnings trends and areas with more reasonable valuations.
• Within equity, we reduced the underweight to Europe because it seems the worst is behind the region in terms of economic growth and inflation. We increased the overweight to Japan due to continued improvements in corporate governance, the BoJ remaining accommodative and the weak yen supporting exporters.
• Within fixed income, we neutralised the allocation to inflation‑linked gilts because inflation is expected to ease further, and to reduce duration. We also neutralised the allocation to UK investment grade corporates because of more attractive opportunities elsewhere in fixed income.
• Additionally, across fixed income, we remain overweight high yield and emerging markets bonds on still attractive absolute yield levels and reasonably supportive fundamentals.

3. Market Themes

Green Shoots?

Economic growth in Europe is showing signs of life after several years of teetering near recessionary levels, with better‑than‑expected first‑quarter GDP growth, largely driven by a services‑led revival. Muted foreign demand especially from China, fears around a natural gas shortage and decades‑high inflation had all weighed on European sentiment in recent years. But the tide appears to be turning on the back of a milder‑than‑expected winter and falling inflation, increasing the odds for an upcoming rate cut by the ECB in June. This has given way to an uptick in consumer spending and provided a boost to Europe’s tourism and hospitality sectors—notably coming from countries such as Spain, Portugal and Greece. However, it’s Europe’s manufacturing powerhouse, Germany, that continues to struggle given its dependence on exports to China and consequences of having relied on Russian energy, with no quick fix on the horizon. For now, positive sentiment on the heels of better‑than‑expected growth, lower inflation and hopes for near‑term rate cuts may draw investors’ attention, but questions remain whether these green shoots will lead to a broader and more sustainable recovery.

The Almighty Dollar

Despite multiple calls for the end of the US dollar’s dominance over recent years, it remains near all‑time highs and has strengthened against every major currency in the world so far this year. Its most recent push higher has stemmed from resilient growth in the US sustained in part by elevated fiscal spending along with sticky inflation, causing a shift to less aggressive Fed rate cut expectations. Meanwhile, many other countries have seen a faster decline in inflation, which has put downward pressure on their currencies versus the dollar on expectations that their central banks move sooner on rate cuts. The strong dollar has many countries seeing their currencies falling to multi‑decade relative lows, with talk of intervention, as in the case of Japan struggling with a slumping yen. While a weaker currency has aided many of these countries’ exporters, it comes with other consequences, including capital competition versus higher‑yielding markets such as the US, import inflation and raising dollar‑denominated borrowing costs for countries that are funding in US dollars. With the Fed expected to move slower on rate cuts, US growth remaining resilient, a packed election calendar and a still unsettled geopolitical environment, it’s hard to see what breaks the buck before it may break something else.

 

For a region-by-region overview, see the full report (PDF).