Global Asset Allocation: The View From the UK

1. Market Perspective

• Economic data are showing resilience as inflation is nearing central banks’ targets, providing room for further easing.
• US data are holding up, confirming a soft landing as inflation nears its target. European growth remains modest and bolstered by services, while manufacturing lags. Japanese growth rebounds from contraction earlier in the year contraction, supported by exports. Surveys indicate re‑acceleration in UK growth. Chinese policymakers take decisive action to support growth.
• The path of Fed cutting is largely dependent on incoming data, while the European Central Bank (ECB) looks to advance easing as inflation data provide support. The Bank of Japan (BoJ) signals a commitment to its divergent path of rates hikes. The Bank of England (BoE) is likely to cut rates gradually. China cuts rates as part of broad stimulus measures to shore up the economy.
• Key risks to global markets include elevated geopolitical tensions, the upcoming US election, central bank policy missteps and the path of Chinese growth.

2. Portfolio Positioning

As of 30 September 2024

• We remain modestly overweight equities. While valuations are elevated, easing monetary policy, Chinese stimulus measures and potential broadening earnings growth should be favourable for equities.
• Within equities, we remain overweight value based on more attractive relative valuations and as global central bank easing should provide a backdrop for broader market participation.
• We maintain an overweight to cash relative to bonds. Cash yields remain attractive even as the BoE embarks on easing as we expect a gradual path.
• Within fixed income, we continue to underweight government bonds and favour higher‑yielding sectors, including high yield bonds and emerging markets bonds.

3. Market Themes

Out of the Woods

The Chinese equity market is up nearly 30% since announcing a larger‑than‑expected stimulus package intended to help stave off further deterioration in growth and quell concerns about its troubled property sector. The coordinated efforts of the People’s Bank of China and financial regulators span across monetary and fiscal measures, including lower rates to support housing and loans to encourage share buybacks. Chinese equities have been a notable laggard this year, reflecting the struggles of policymakers to reverse slumping growth and falling well short of their 5% growth target. And with the potential threats of a shift in US policy on the horizon, their export‑heavy economy could find itself under more pressure. So, while the far‑reaching measures are a step in the right direction and have been cheered by emerging market investors, the structural headwinds facing China are vast, leaving many skeptical that China is out of the woods just yet.

Hold the Bubbly

Amongst major central banks, the ECB just saw its first read on inflation below its 2% target, down from an 11% peak in September 2022, freeing up the path to lowering rates further. This is welcome news for other central banks as well, which are seeing similar progress toward their targets. Notably, this progress is being achieved while global growth is holding up, with some areas showing surprising resilience. The forces that had driven inflation higher, including COVID‑related supply shortages, excess savings supporting consumer spending and unleashed pent‑up demand driving services inflation, have faded. By all measures, it is looking like central bankers may have pulled off the once unthinkable ‘soft landing’ and should be celebrating. But, unfortunately, the current backdrop of geopolitical tensions and the threat of policy shifts having an impact on growth and possibly reigniting inflation concerns has them holding off on popping the bubbly, for now.

 

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