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The View - asset allocation update

8 months ago

Remi Lambert, Chief Investment Officer

Rémi Lambert
Chief Investment Officer

Macroeconomic backdrop

US third quarter GDP data released at October month-end rose by 4.9%, its fastest rate of growth since Q4 2021. Domestic consumer spending was supportive, reflecting healthy wage growth. The Fed left interest rates unchanged at 5.25-5.5% following its October 31 - Nov. 1 meeting and US Federal Reserve (Fed) chair Jerome Powell refrained from hawkish comments about the need for further hikes. Combined with lower-than-expected US job hiring reported in early November, this encouraged investors into a belief the Fed’s aggressive rate hiking campaign was working to slow the economy and inflation. Market sentiment turned risk-on by period end, in contrast to the prevailing mood a month ago.

Market update

Global equities fell in October, when the MSCI World Index returned -3.0%. Investors were spooked by the conflict in the Middle East and the ‘higher for longer’ central bank orthodoxy. Markets then rebounded strongly, and in the first week of November the S&P 500 produced its best weekly performance of 2023. The benchmark US 10 year Treasury yield fell to 4.5% over the same period, from 5% the previous week. The dollar index (DXY) weakened as investor sentiment turned more buoyant. After oil rose by more than 10% to $93 a barrel following the outbreak of the Israel-Hamas conflict in early October, prices subsequently fell to just above $81 a barrel, as the danger of a wider regional conflict dissipated.

Architas view

Architas view

Reacting to the higher for longer interest rate narrative, equity markets had a difficult September and October. In recent weeks, stocks have stabilised as these concerns have receded. Interest rates will likely remain at elevated levels well into 2024, when they will begin to weigh more heavily on economic activity, but this is likely to prove more of a medium term risk. In the near term, investors will continue to focus on the improving inflation outlook and growing softness in the labour market, both of which raise the probability that the Fed needs to be less hawkish.

The key risks facing economic growth are fairly reflected in current prices. Indeed, we may enjoy a strong finish to the year in equity markets given recent momentum, and as more positive seasonal sentiment combines with more attractive valuations following the market corrections from their late July highs.

For these reasons, we are increasing our equity positioning to Overweight from Neutral, by raising our exposure to US equities. Mega cap growth companies, predominantly based in the US, are the most likely beneficiaries of the positive near term interest rate outlook.

To facilitate this tactical adjustment, our preference will be to reduce risk within fixed income, in particular by lowering our exposure to emerging market debt (EMD) and high yield. Longer term, however, we remain positive on both asset classes. 

Elsewhere in fixed income, we will look to take profits following the recent rally enjoyed by US Treasuries, leaving us neutral towards both US and Euro government bonds.

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