Global Asset Allocation: The View From Europe

1. Market Perspective 

• Global economic growth has been mixed across regions, with inflationary pressures and central bank policies starting to diverge.
• US and Japanese economies are proving more resilient, although the US is seeing evidence of cooling amid recent jobs data. Weakness is seen across Europe as the region works through a mild recession and elevated, albeit softening, inflation. Chinese growth is mixed as recent slowing is met with stimulus measures amid growing concerns surrounding its property sector.
• While global central bank tightening is likely peaking, the paths and rates of disinflation vary across regions, which is likely to lead to divergence in policy ahead.
• Key risks to global markets include a deeper than expected decline in growth, central bank missteps, reacceleration in inflation, trajectory of Chinese growth, and geopolitical tensions.

2. Portfolio Positioning 

As of 31 August 2023

• We maintain a balanced view on risk with a modest underweight to equities as valuations remain elevated amid a less dire outlook for growth and expectations for peaking central bank policy. 
• Within equities, we remain neutral on the US and the UK, underweight Europe, and modestly overweight in Japan and emerging markets.
• Within fixed income, we remain underweight bonds in favour of cash as cash offers attractive yields and liquidity should market opportunities evolve. We have an underweight to government bonds and an overweight to inflation‑linked bonds. This acts as ballast to risk assets and as a hedge against inflation settling above central banks’ targets, as well as the potential for higher commodity prices over the intermediate term, reflecting reduced capex and moderating productivity trends.
• Within fixed income yield‑seeking sectors, we remain overweight high yield and emerging market bonds on still attractive absolute yield levels and reasonably supportive fundamentals.

3. Market Themes 

A Jolt of Confidence

The most recent JOLTS¹ data, a measure of labour demand, showed job openings have come down significantly and are now the lowest since March 2021, a welcomed sign for the Fed that excess demand in the labour market may finally be starting to cool. The data also showed that fewer workers were quitting their jobs and that hiring broadly moderated, both moving in favourable directions for balancing the labour market and easing wage growth concerns. Layoffs were relatively flat, meaning that the labour market has cooled by removing some of the froth in demand without increasing unemployment, helping support the narrative of a soft landing. However, while wage growth data have showed evidence of slowing, they are still elevated; the number of job openings per unemployed person is still high; and the labour market remains tight by historical measures, with the unemployment rate at just 3.8%. So, while the recent softening jobs data have provided a jolt of confidence that the Fed may navigate a soft landing, we still have further to go to align the jobs market and wages with the Fed’s 2% inflation target.

Diverging Markets?

After a strong start to the year surrounding optimism around China’s reopening, recent emerging markets’ performance has disappointed. Although there have been some bright spots across emerging markets (EM), as some Latin American countries have successfully brought down inflation, Mexico is seeing the benefits from nearshoring and India’s growth is surprising to the upside, these countries have largely been overshadowed by doubts surrounding China’s growth trajectory. Concerns surrounding China’s troubled property sector have reemerged and weighed heavily on household confidence and willingness to spend. This comes at the same time as structurally rising unemployment weighs against Chinese policymakers’ multiyear efforts to move the economy away from an export‑driven economy into a more sustainable, consumption‑driven and domestically focused economy. In response to today’s issues, policymakers have been targeted in deploying stimulus measures such as liquidity support for property developers, relaxing some housing policies, and incremental cuts to its key policy rate, as a conscious effort to not reinflate a bubble. So, while there are pockets of opportunity in EMs, it’s likely that the broader group’s outlook will largely depend on China’s ability to restore confidence domestically and globally.

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