Global Asset Allocation: The View From the UK

1. Market Perspective

• Global growth remains broadly resilient with some signs of cooling along with easing inflationary pressures.
• Recent data across consumer, labour and businesses point to a moderation in US growth. European growth is stable, helped largely by services. On a rolling three‑month basis ending in May, the UK economy grew at the fastest pace since 2022. The growth outlook in Japan is improving, albeit still muted, while stimulus measures in China targeted at the housing market help underpin the growth outlook.
• The US Fed remains patient as recent data suggest that tight policy may finally be weighing on growth. The European Central Bank (ECB) has taken the lead on easing policy, with more cuts likely. Although the Bank of England (BoE) wants to cut, high and persistent inflation may remain in the way, preventing the bank from getting more than two cuts this year. Despite weaker recent growth, the Bank of Japan (BoJ) is still expected to take additional steps towards tightening.
• Key risks to global markets include a steeper decline in growth, stubborn inflation, the election calendar, central bank policy divergence, geopolitical tensions and the trajectory of Chinese growth.

2. Portfolio Positioning

As of 30 June 2024

• We remain modestly overweight equities, as valuations beyond narrow leadership remain reasonable and economic growth, while slowing, is still supportive for earnings.
• We maintain an overweight to cash relative to bonds. Cash yields remain attractive with less aggressive expectations for BoE cuts, and cash provides liquidity should market opportunities arise.
• Within fixed income, we remain underweight to gilts and overseas government bonds because yields remain under pressure and moved to overweight to inflation‑linked gilts to hedge against sticky inflation.
• Within fixed income, we continue to favour higher‑yielding sectors including high yield and emerging markets bonds as fundamentals remain broadly supportive.

3. Market Themes

Oh Snap!

While investors were already expecting the possibility for heightened volatility around a packed global election calendar, those risks have only been amplified with the recent snap elections in France and the UK. Discontent with incumbent leaders has been a common theme leading to several opposition party wins, with economic, trade and immigration policies and corruption also contributing to voter dissatisfaction. The uncertainty associated with these elections could aggravate an already fragile global economic environment on the cusp of finally reining in inflation and skirting a more severe downturn. With the potential for abrupt changes in fiscal policies, trade and tariffs on the horizon, markets could become increasingly volatile as they weigh the impacts. Some of this is already playing out across European markets, which appeared to be turning the corner economically just weeks before recent snap elections were announced. With more elections to come and the increasing uncertainty around the US elections that are still months out, the uncertainty itself could become an increasing downside risk to growth and one leading to central bankers regretting not snapping at the opportunity when they had it.

Uptight

While other major central banks have taken the leap in cutting rates, including the ECB and Canada this past month, the Fed remains patient despite mounting evidence of slowing US economic growth. With cracks in the data starting to form across the ever‑resilient US consumer, particularly among lower incomes, and the large pandemic savings buffer now depleted, consumer spending that had helped underpin inflation may finally be waning. The business sector, too, is starting to show cracks with recent declines in new orders and shipments. This weakness amongst consumers and businesses could quickly turn on the tight labour market, which itself has shown recent signs of cooling, as quit rates and job openings have fallen. And while the Fed’s preferred gauge of inflation, core personal consumption expenditures, remains above their 2% target, incoming data may soon become hard to ignore as it tilts the balance of risk away from sticky inflation and towards weaker growth. Let’s hope the Fed isn’t too “uptight” about getting it wrong on inflation for a second time and won’t end up being the party crashers for the economy.

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