Global Asset Allocation: The View From Europe

1. Market Perspective

• Given asynchronous trends in growth and inflation policy, divergence is expected in 2024.
• European economic growth and inflation are trending lower, giving the European Central Bank flexibility. The Bank of Japan is expected to tighten policy in the first half of the new year. Despite increasing evidence of softening inflation, US Federal Reserve Chair Jerome Powell reiterates the pledge to hold rates higher. Chinese growth is incrementally improving, aided by stimulus support.
• Key risks to global markets include central bank missteps, a deeper retrenchment in growth, sticky inflation, a trajectory of Chinese growth and geopolitical tensions.

2. Portfolio Positioning

As of 30 November 2023

• We have a balanced view on equities supported by positive earnings trends and more attractive valuations beyond narrow leadership, against a backdrop of softening growth and still high interest rates. We remain overweight areas of the market with supportive valuations, such as small‑caps, Japanese equities, global high yield bonds and emerging market debt.
• Within equities, we remain overweight US large‑cap growth due to the continued strength of technology and artificial intelligence, US small‑caps because of attractive valuations, and Japan due to the reflationary story and governance improvements. Europe ex UK remains an underweight due to slowing growth and restrictive monetary policy.
• Within fixed income, we remain modestly overweight cash relative to bonds. 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

A November to Remember

November was a banner month for stocks and bonds, with the S&P 500 Index up close to 9%—its seventh best month over the last 30 years—and US 10‑year Treasury yields rallying over 50 bps, as the market interpreted cooling inflation data as an indication that the Fed could begin easing policy earlier than anticipated. Further evidence of lower consumer spending, a softening labour market and a continued downshift in PMIs further supported the narrative that tighter financial conditions are finally taking hold. Despite the market’s euphoria over November’s bad news possibly pulling forward rate cuts, Fed Chair Powell ended the month reiterating that the Fed is committed to holding rates higher and is not ready to declare victory on inflation just yet. The year 2024 is setting up to be a critical year for the Fed, not wanting to make a similar policy mistake as it did over the coronavirus pandemic by not getting ahead of ‘transitory’ inflation. While Powell may keep policy tight to ensure he stamps out inflation, it could be at the expense of not acting soon enough and allowing the lagged effects of monetary policy to push the economy into a recession. This tough decision may be made more complicated with the upcoming election.

Home for the Holidays!

For want‑to‑be homeowners who had hoped to be in a new home for the holidays, September’s new record in home prices was not welcomed news. A lack of supply due to existing homeowners’ unwillingness to leave their current low rate mortgage for much higher rates has been the main reason for the shortage. And while mortgage rates are off their October highs, a 30‑year fixed mortgage is still near 7.5%, well above the average current outstanding rate of 3.7%. The modest decline in rates, however, has been met with an increase in new listings which can help ease tight supply. Should the Fed start to lower rates next year as the market is expecting, that could be a welcomed sign for the housing market in enticing existing homeowners to sell and helping on the affordability front for buyers. The outstanding question is where will home prices be by the holidays next year—as lower rates typically mean higher prices? Hopefully this holiday brings homebuyers a surge in supply; otherwise, they may be still wishing for a new home next year too.

 

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