Global Asset Allocation: March Viewpoints

Please note, the below commentary and data reflects our asset allocation positioning as at end of February. We are, of course, closely monitoring events surrounding volatility in the US and European banking sectors and will provide asset allocation perspectives on that in our next month's Viewpoints update.

1. Market Perspective

• Global growth is proving resilient in the face of tighter monetary policies; however, impacts of central banks’ tightening are still expected to weigh on the economic growth and earnings outlook in the back half of the year. 
• Despite declining goods inflation, services inflation remains sticky on the back of higher wages, keeping the US Federal Reserve and other central banks hawkish.
• While uncertainty remains, optimism surrounding China’s reopening and resilient growth in Europe, supported by declining energy costs, could help buoy the global economy.
• Key risks to global markets include central bank missteps, resilient inflation, steeper growth decline resulting in a hard landing and geopolitical tensions.

2. Portfolio Positioning

As of 28 February 2023

• We remain underweight equities and bonds in favour of cash. Equity valuations remain extended in the face of tightening liquidity and slowing growth. Bond yields are likely to remain volatile amid mixed economic data and central bank policy shifts, while cash offers attractive yields and stability.
• Within equities, we are overweight areas with more attractive valuation support such small‑/mid‑caps, Japan and emerging markets (EM). We also maintain a broad balance between value and growth—with a modest overweight to value—to reduce exposure to extreme interest rate sensitivity and cyclicality.
• Within fixed income, we remain overweight emerging market bonds, where yields still offer reasonable compensation for risks despite persistent market volatility.

3. Market Themes

Too Hot to Handle

Recent good news on consumer spending, sentiment and employment has been bad news for the US Fed as they are not seeing evidence that aggressive rate hikes are having the intended impacts in slowing growth and reining in inflation. Markets had started the year positively on signs of peaking central bank tightening; however, the positive sentiment quickly faded as expectations for the path of future rate hikes jumped in response to the hotter data. Over the course of February, the futures market went from projecting the fed funds rate to peak at 4.90% in June to a projected peak of 5.41% in October. Having already raised rates by 450 basis points over the past year, the Fed is hopeful that the lagged effects will help them reach their inflation target of close to 2%, but if the economic data keep coming in strong, the Fed may find it too hot to handle and need to step up the tightening. The months ahead are likely to be volatile as every bit of data will be scrutinised by investors hoping for just enough bad economic data to please Fed officials, yet not bad enough to signal that a hard landing is imminent.

Last One Standing

Bank of Japan (BoJ) Governor Haruhiko Kuroda is set to step down in early April after a decade in office, with markets speculating that ultra‑easy monetary policies he oversaw may be ending. The bank had already surprised markets when it eased yield curve controls at the end of last year, allowing rates to rise more. With inflation running near 4.3%, a 40‑year high, the BoJ has been the last major central bank standing firm with ultra‑easy policy, while almost all others pivoted to aggressive rate hikes to fend off high inflation. With his expected replacement, Kazuo Ueda, coming into office amid high inflation, it is likely Mr Ueda will begin to take further steps to unwind ultra‑easy policy. While stocks and bonds have broadly declined in the face of higher inflation and rates, Japanese markets may benefit as assets are repatriated back home, where they are now able to earn higher yields. For investors outside of Japan, a stronger yen supported by higher yields could provide a further boost to Japanese market returns. Although inflation has not been a friend to investors elsewhere, the Japanese market may be one area where investors welcome it.

 

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