November 2024
Global Asset Allocation Viewpoints
Welcome to our latest Asset Allocation Viewpoints - your monthly source for actionable insights on portfolio positioning from our Asset Allocation Committee and Multi-Asset team.
Market Perspective
- Economic data continues to show signs of resilience and inflation remains on moderating path, providing room for further easing.
- U.S. data holding up confirming soft landing as inflation nears target. European growth remains modest and bolstered by services, while manufacturing lags. Japanese growth modestly slowing as manufacturing output softened. Chinese stimulus expected to continue to bolster growth, though impacts so far have been modest.
- Path of Fed cutting largely dependent on incoming data, while European Central Bank looks to advance easing as inflation data provides support. Bank of Japan signals commitment to their divergent path of rate hikes.
- Key risks to global markets include elevated geopolitical tensions, central bank policy missteps, and path of Chinese growth.
Portfolio Positioning
- Despite elevated valuations, we modestly increased our overweight to equities, on a more favorable outlook centered around easing monetary policy, Chinese stimulus measures, and potential for broadening earnings growth.
- Within equities, although we remain overweight large-cap value based on more attractive valuations and potential for broader market participation, we slightly raised our allocation to large-cap growth as the sector should continue to see durable earnings growth from several high-quality companies.
- Also, within equities, we took the opportunity to moderate our emerging markets overweight following the recent rally in China. Although Chinese stimulus should continue to provide a tailwind, potential policy shifts create uncertainty.
- We maintain an overweight to cash relative to bonds. Cash yields remain attractive even as Fed embarks on easing as we expect a gradual path.
- Within fixed income, we continue to favor higher-yielding sectors including high yield bonds, floating rate loans, and emerging markets bonds.
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Market Themes
Checks and Balances
The markets’ immediate reaction to President Trump’s victory has for the most part played out as if his new term will take off where his last ended. A lot, however, has changed in the past four years and executing on many of his campaign promises including higher tariffs and deregulation could bring about inflationary pressures. When the President first took office in 2016, inflation was low and central banks had policy rates anchored at near zero levels in an effort to increase inflation. That’s not so today, as inflation is just finally nearing central bank targets, policy rates and bond yields are at much higher levels and deficit spending has only grown. Because it is now looking increasingly possible that Republicans may also sweep both houses of Congress, market reaction is reflecting the increasing likelihood that Republicans will be able to quickly act on their agenda. While there will undoubtedly be significant changes in policy coming, it may be the forces of higher inflation and rates that prove to be the checks and balances that keeps some discipline in policy.
Facing Higher Inflation & Rates Today
As of 30 September 2024
Past performance is not a reliable indicator of future performance.
Source: Bloomberg Finance L.P.
Earning their Share
While the S&P 500 has continued to deliver strong earnings, it has been primarily driven by the Magnificent 7, and their performance has reflected that versus the broader market. And with their earnings now starting to slow from extreme levels on moderating spending in AI, investors are beginning to look to the “other 493,” which are seeing encouraging signs of earnings growth. This broadening began in the second quarter and has continued into the third quarter on the back of better economic growth and easing monetary policy. And while the direction is encouraging, their earnings are only moving up to low single digits from negative levels, while the Magnificent 7 are still expected to deliver growth near 20% levels. Despite the earnings backdrop still favoring the Magnificent 7, still resilient economic growth, easing monetary policy, and now potential changes in fiscal and regulatory policies could provide tailwinds to companies beyond the Magnificent 7 – giving them a better shot at earning their share.
Earnings Growth Differentials Beginning to Compress
As of 31 October 2024
Past performance is not a reliable indicator of future performance.
Source: Bloomberg Finance L.P.
Regional Backdrop
Click each region below for more details
- Fed has begun cutting rates
- Resilient corporate earnings
- Recent inflation reports have been favorable
- Earnings boosted by AI infrastructure spending
Negatives
- Stock valuations have become challenging
- Consumption trends are weakening
- Bank of Canada has cut rates significantly
- Economic growth is improving
- Corporate profit margins remain healthy
Negatives
- Unemployment is rising
- Consumer debt levels are elevated
- Equity valuations are slightly elevated
- Monetary policy expected to ease further
- Unemployment remains low
- Equity valuations are attractive
Negatives
- Economic growth remains weak
- Geopolitical uncertainty remains heightened
- Earnings growth is structurally weak
- Monetary policy expected to ease further
- Inflation concerns have moderated
- Economic growth outlook has stabilized
Negatives
- Fiscal consolidation may need to be accelerated
- Tight labor markets could keep wage inflation stubbornly high
- Reflationary environment continues
- Corporate governance improvements continues
- Weaker yen is boosting earnings forecasts
Negatives
- Political instability is impacting foreign investment flows
- BoJ will maintain a hawkish bias due to string wage growth
- Manufacturing indicators are weak due to a drop in global demand
- Australian dollar up on monetary policy divergence
- Government stimulus remains supportive
Negatives
- Market pricing appears to be too optimistic about future rate cuts
- Valuations are elevated despite earnings weakness
- Margins are at risks due to elevated wage growth
- China has enacted coordinated stimulus efforts
- Chinese stimulus has positively impacted investor sentiment
- Monetary policy is loosening in many emerging markets
Negatives
- Chinese property deleveraging continues to weigh on activity
- Export demand from developed markets remains muted
- Geopolitical risks are rising
Asset Allocation Positioning
These views are informed by a subjective assessment of the relative attractiveness of asset classes and subclasses over a 6- to 18-month horizon.
Asset Classes
Despite elevated valuations, we see potential for broadening of earnings growth as developed market central banks cut rates. Questions remain around AI momentum, economic growth, and geopolitical tensions.
Yields have moved higher on resilient growth and potential for increased fiscal spending, however, moderating inflation and further central bank easing could bias yields lower from here. Credit fundamentals remain supportive; however, spreads remain tight.
Despite recent shift downward on the back of Fed easing, cash still provides attractive yields and offers liquidity should market opportunities arise.
Equities
Regions
Monetary policy easing could stimulate broader economic activity and earnings growth. Technology and pharmaceutical innovation remain key differentiators, although valuations remain elevated.
Dividend yields and valuations are attractive on a relative basis. Improving European growth and inflation outlook, easing central bank policies, and Chinese stimulus provide incremental support against a still fragile backdrop.
Valuations are attractive, monetary policy is easing and China has signaled a willingness to provide more significant monetary and fiscal support.
Style & Market Capitalization
Easing monetary policy has been supportive of rate sensitive sectors and could lead to earnings broadening. Meanwhile growth stocks face elevated expectations, challenging valuations, and growing AI skepticism.
Value stocks are cheap and could benefit from improving financial conditions. Growth stocks’ valuations are more expensive and face headwinds from structural consumer weakness in emerging markets.
Small-caps offer attractive relative valuations with support from a dovish tilt in Fed expectations. However, a modest economic growth backdrop could pose a challenge.
Monetary easing, lower inflation, and less exposure to trade policy could provide tailwinds with still very attractive valuations.
Inflation-Sensitive
Commodity-related equities offer protection against a resurgence in inflation. Peaking benefits from productivity advancements could lead to higher oil prices, while some industrial metals could see increased demand from AI spending and decarbonization.
Bonds
Yield curve likely to steepen as longer rates biased higher and short rates lower with Fed easing. Within credit, fundamentals supportive, while valuations leave limited upside.
Most global central banks have begun rate cutting cycles, with the exception of the BoJ. Yields remain attractive on a hedged basis, but could fade as the Fed continues to cut.
Longer-term yields to remain vulnerable to better growth outlook, possible stickier inflation and increased supply on fiscal spending outlook.
Longer-term yields to remain vulnerable to better growth outlook, possible stickier inflation and increased supply on fiscal spending outlook.
Fundamentals remain supportive, and default expectations are expected to remain contained. Despite elevated valuations, yield levels remain compelling and could offset spread widening.
More modest pace of Fed cuts should weigh less on floating rate loans with yield levels still attractive and still strong underlying fundamentals, while keeping a cautious eye on liquidity.
Despite tight spreads, the sector continues to offer pockets of attractive yields. Economic backdrop uncertainty highlights the importance of credit selection and underwriting.
EM sovereign valuations are relatively attractive. Constructive backdrop amid central bank easing and potential for lower U.S. dollar.
Central bank easing and stronger currencies could provide a tailwind.
*For pairwise decisions in style & market capitalization, positioning within boxes represent positioning in the first mentioned asset class relative to the second asset class.
The asset classes across the equity and fixed income markets shown are represented in our Multi-Asset portfolios. Certain style & market capitalization asset classes are represented as pairwise decisions as part of our tactical asset allocation framework.
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Portfolio Implementation
Equity
Tactical Allocation Weights
Fixed Income
Tactical Allocation Weights
1 U.S. small-cap includes both small- and mid-cap allocations.
Source: T. Rowe Price. Unless otherwise stated, all market data are sourced from FactSet. Copyright 2024 FactSet. All Rights Reserved.
These are subject to change without further notice. Figures may not total due to rounding.
Neutral equity portfolio weights representative of a U.S.-biased portfolio with a 70% U.S. and 30% international allocation; includes allocation to real assets equities. Core fixed income allocation representative of U.S.-biased portfolio with 55% allocation to U.S. investment grade.
Important Information
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