Inview May 2024

Editorial

Welcome to the May edition of Inview: Monthly Global House View. In this publication we consider significant developments in the world’s markets, and discuss our key convictions and themes for the coming months.

After a strong start to the year, global stock markets experienced some profit taking in April. The MSCI World All Country total return index was down 3.3% for the month, reducing year-to-date gains to +4.8%. Government bonds also fell with the 10-year Treasury yield rising briefly above 4.70%. The US dollar strengthened further, notably against the Japanese yen, supported by a more hawkish outlook for the US Federal Reserve. Commodity prices, including gold, oil and industrial metals, have risen in response to geopolitical tensions and signs of firming global growth.

The risk of escalating Middle East tensions has been prominent over the last few weeks. Despite recent improvement, the situation remains fragile and should be monitored closely as should developments related to the war in Ukraine. The upcoming US presidential election is also attracting increased attention.

Markets have also been sensitive to shifting monetary policy expectations and tentative signs of recovery in China. The strength of US growth and inflation suggest that the Federal Reserve will delay cutting interest rates. Conversely, the faster-than-expected decline in inflation in Europe points to likely rate cuts starting as early as June. In Japan, the central bank has begun its exit from the ultra-expansionary policies of the last thirty years but seems willing to proceed with caution.

The Chinese economy has finally shown some positive momentum after a long period of relatively weak growth. In the first quarter of 2024, GDP grew more than analysts’ expectations and several indicators point to a continuation of the recovery for the rest of the year, a factor which has helped support the prices of industrial metals. The Q1 corporate earnings season was robust, driven once again by large US technology companies and financial firms.

An improved growth outlook remains supportive of risky assets but increased short-term volatility cannot be ruled out as markets ponder the outlook for monetary policy. A neutral exposure to fixed income assets and a moderate overweight in equities looks appropriate in this context. Notably, the improved political outlook in the UK justifies an increased equity exposure at the expense of Latin American markets that have recently lost momentum.

Asset Allocation

Global Allocation

The overall economic and market environment remains benign. There has been divergence in the path for rate cuts this year between the US and other developed economies. Stronger US economic data has justified why rate cut expectations have been pushed out, although these expectations are highly sensitive to incoming macroeconomic data. The anticipated correction in markets materialised in early April, with equities down close to 5%. However, the downturn was short-lived and markets rallied in the last week of the month. Bond markets reacted negatively to the delay in the prospects for a first rate cut in the US.

After accounting for market drift, the fixed income allocation was adjusted back up to be in line with the neutral benchmark. Meanwhile equity positioning was marginally rebalanced. We are pleased with our decision earlier in the year to increase the cash allocation given recent market moves. In our view it is still too early to deploy some of the cash position in case there is another market correction which could provide a better entry point into equities.

Fixed Income

In line with our UK equity upgrade we are increasing our exposure to GBP denominated investment grade bonds, although still remain underweight versus the benchmark. In tandem GBP sovereign bonds were reduced although we maintain an overweight stance. High yield bond spreads are still tight in USD and EUR, so we remain underweight in these areas relative to the benchmark. We are extending portfolio duration to 4 years to remain positioned in the 3-5 year part of the curve we prefer. Previously duration was held at 3.5 years in line with the benchmark.

Equities

Our allocation to UK equities is being upgraded to an overweight position. This is for several reasons. First, we are turning more optimistic on the UK economy based on the possibility of a change in government at some point this year, something which could deliver a more pro-business and pro-Eu administration. Second, technical factors are breaking out past seven-year highs while risks have come down. Furthermore, the UK is a very value-driven market and so increasing exposure to UK equities will allow us to increase our value factor to help balance the growth factor from our US equities. To raise our UK allocation, we are reducing our Latin American equity exposure. While it only accounts for a small portion of the overall equity allocation and despite the reduction we are still modestly overweight. Equities in the region have underperformed despite the outperformance of commodities while technical factors are turning negative. Despite recent moves in Asian stocks it is still too early in our view to bring Japanese equities back to neutral.

Alternatives

No changes were made to our alternatives allocation. We continue to hold an underweight allocation to commodities versus the benchmark, with our focus being on gold. We note that our gold model points to the precious metal looking overbought at current levels, given the strength of the us dollar, rates being supportive and volatility still benign. Within hedge funds we are taking a more neutral view on equity market neutral managers given the recent peak in returns. Alongside this there is improved sentiment around macro and commodity trading advisor (CTA) managers.

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