March 2024 / INVESTMENT INSIGHTS
Global Asset Allocation Viewpoints
Our experts share perspective on market themes and regional trends, plus insights into current portfolio positioning.
Market Perspective
As of 29 February 2024
- Firming in global growth expectations, with recent data tilted more positively, while inflation continues to decelerate across most regions.
- U.S. growth remains most resilient amongst developed economies while weak European growth potentially bottoming. Emerging markets growth outlook improving, with hopes for stabilization in China driven by policy support.
- While progress on inflation gives support for the U.S. Fed to pivot towards cuts, resiliency in the economy could delay the start. European Central Bank moving closer to easing amid fragile growth and as inflation has moved past its peak. Bank of Japan cautiously eyes exiting negative rate policy in the first half of this year.
- Key risks to global markets include impacts of geopolitical tensions, central banks’ policy divergence, a retrenchment in growth, resurgence in inflation, and trajectory of Chinese growth and policy.
Portfolio Positioning
As of 29 February 2024
- We shifted to a modest overweight position in equities, funded from cash and bonds, supported by a firming growth and disinflation backdrop, positive earnings trends, and reasonable valuations outside of large-cap growth.
- We continued to add to large-cap value across global developed markets as we think a firming cyclical environment, where both growth and inflation stabilize from here, could favor value stocks.
- 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.
Market Themes
As of 29 February 2024
Getting Back Together
Heading into 2024, the consensus view was the U.S. Fed was going to be the leader in cutting interest rates among developed market central banks, given its progress on inflation and higher current rates, while the ECB was seen as a laggard given stickier inflation and despite weaker growth. Fast forward to today, U.S. growth has surprised to the upside and the pace of disinflation has slowed, and the labor market has remained resilient, pushing out rate cut expectations. Conversely, a quickening in disinflation, now below the U.S., and fragile growth in the Eurozone, has pulled forward expectations of an ECB rate cut. Although, the ECB appears to also be taking a patient approach, cautiously monitoring wage growth and upcoming labor negotiations to assure that inflation pressures are abating. Ironically the diverging dynamics between the two, appears to be bringing the Fed and ECB back together again at least from a timing standpoint, with markets now pricing in rate cuts to start in June for both. And while more synchronized moves by the central banks could help mitigate volatility, there remains a lot of uncertainty between now and June, that could push them back apart.
Inflation: Eurozone Catching Down with U.S.1
As of 29 February 2024
No Bull!
Within fixed income markets, the bull steepening of the yield curve has been a consensus trade among bond managers that has proven elusive thus far this year. With everyone betting that the Fed would soon be embarking on cutting rates, sending short-term yields falling faster than longer-term yields–a positive for short-term bond prices–as the curve re-steepened. The yield curve has now been inverted for a record number of months, typically a harbinger of an impending recession. The resilience of the U.S. economy and still gradual progress with disinflation is increasing the odds that the economy skirts a recession this time around. While welcomed news on the economic front, it has given the Fed breathing room to stick with the “higher for longer” plan to ensure inflation is indeed under control, and an unwelcome development for those betting short rates were coming down soon. Those hopes also extended to equity investors, bullishly expecting falling short-term yields would entice the over $6 trillion pile of cash parked in money market funds back into risk assets. While the bet on the bull steepening has proven elusive thus far, we do expect it–albeit later and more gradually playing out.
Yield Curve: Short Yields Remain Anchored
As of 29 February 2024
Regional Backdrop
As of 29 February 2024
Views | Positives | Negatives | |
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United States | N |
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Canada | N |
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Europe | U |
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United Kingdom | N |
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Japan | O |
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Australia | N |
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Emerging Markets | O |
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Asset Allocation Committee Positioning
As of 29 February 2024
Additional Disclosures:
Certain numbers in this report may not equal stated totals due to rounding.
Source: Unless otherwise stated, all market data are sourced from FactSet. Financial data and analytics provider FactSet. Copyright 2024 FactSet. All Rights Reserved.
Key risks –The following risks are materially relevant to the information highlighted in this material:
Even if the asset allocation is exposed to different asset classes in order to diversify the risks, a part of these assets is exposed to specific key risks.
Equity risk – in general, equities involve higher risks than bonds or money market instruments.
ESG and Sustainability risk – May result in a material negative impact on the value of an investment and performance of the portfolio.
Credit risk – a bond or money market security could lose value if the issuer’s financial health deteriorates.
Currency risk – changes in currency exchange rates could reduce investment gains or increase investment losses.
Default risk – the issuers of certain bonds could become unable to make payments on their bonds.
Emerging markets risk – emerging markets are less established than developed markets and, therefore, involve higher risks.
Foreign investing risk – investing in foreign countries other than the country of domicile can be riskier due to the adverse effects of currency exchange rates; differences in market structure and liquidity, as well as specific country, regional, and economic developments.
Interest rate risk – when interest rates rise, bond values generally fall. This risk is generally greater the longer the maturity of a bond investment and the higher its credit quality.
Real estate investments risk – real estate and related investments can be hurt by any factor that makes an area or individual property less valuable.
Small- and mid-cap risk – stocks of small and mid-size companies can be more volatile than stocks of larger companies.
Style risk – different investment styles typically go in and out of favour depending on market conditions and investor sentiment.
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