Global Asset Allocation: The View From Europe

1. Market Perspective

• Global growth expectations have stabilised, near the same levels as last year, with disinflation gaining momentum hinting at a global ‘soft landing’
• US growth remains most resilient amongst developed economies, while European growth remains weak. The emerging markets growth outlook is improving, with hopes for stabilisation in China driven by policy support.
• Progress on inflation and stable growth give support for the US Fed and other central banks to pivot towards rate cuts. The European Central Bank (ECB) is moving closer to easing as it balances fragile growth and inflation. The Bank of Japan (BoJ) cautiously eyes exiting its negative rate policy in the first half of this year. 
• Key risks to global markets include impacts of geopolitical tensions, central banks’ policy divergence, a retrenchment in growth, a resurgence in inflation and the trajectory of Chinese growth and policy.

2. Portfolio Positioning

As of 31 January 2024

• We maintain a balanced view on equities supported by positive earnings trends and loosening financial conditions against a backdrop of elevated valuations.
• We trimmed our overweight to Japanese equity, taking profits, and added to US large‑cap value as we think a firming cyclical environment, where both growth and inflation stabilise from here, could favour value stocks.
• Within fixed income, we remain underweight government bonds and overweight cash relative to bonds. We believe bond yields are likely to rise because of a resilient economy and central banks not cutting rates as soon as the market expects. Cash continues to provide attractive yields and liquidity to take advantage of potential market dislocations.
• Within fixed income, we remain overweight high yield and emerging market bonds on still‑attractive absolute yield levels and reasonably supportive fundamentals.

3. Market Themes

No Quick Fix

Despite a range of stimulus measures rolled out since the second half of 2023, China’s economy remains challenged as little so far has led to a meaningful turnaround in activity or its stock market’s decline. While Chinese officials pledge more aggressive support, investors are becoming increasingly concerned as there seems to be a disconnect with consumer confidence sliding along with stock prices–slipping to five‑year lows. While China’s troubled property sector remains at the crux of the country’s current issues, record youth unemployment above 20%, a declining population and deflationary pressures caused by weak domestic and export demand have added to the list of headwinds. And while recent data have shown somewhat of a stabilistion in declining home prices in response to stimulus measures, sales remain weak and recent news surrounding the forced liquidation of Evergrande–the country’s largest property developer–is yet another challenge to the beleaguered sector. While policymakers look to shore up the foundation of the world’s second‑largest economy this year, a ‘quick fix’ is unlikely to be enough, leaving investors hopeful for more substantial policy changes to bring more sustainable growth to China.

Keep On Keeping On

After a strong fourth‑quarter rally on rate cut hopes, investors turned a bit skittish at the start of 2024 on better‑than‑expected economic data pushing out those hopes–but it has since rallied back sending the S&P 500 Index to record highs. It is not surprising to see equity markets cheering the growing prospects of a ‘soft landing’ with growth intact and inflation easing, giving the Fed the green light to loosen financial conditions in the coming months. Companies too are proving resilient, with earnings expectations improving and easing costs helping to boost margin expansion this year. Big Tech earnings and artificial intelligence euphoria are also lending support. While the momentum may continue, extended valuations and complacency could leave markets ripe for correction. There is a lot riding on the Fed keeping the course on easing that remains vulnerable to incoming data, geopolitical flashpoints are increasing across the globe and the US is nearing another contentious election in the coming months. But for now, it looks like stocks could keep on keeping on, looking through the risks, pointing to the positives on both the economic and earnings front.

 

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