Allocation Views: Staying in the saddle

Preview

A healthy market correction in early August reset sentiment and positioning to more neutral levels and stabilized equity markets. However, potential volatility linked to the upcoming US election, alongside seasonality concerns, tempers our enthusiasm and informs our neutral allocation to risk assets.

In this month’s Allocation Views, given the uncertain environment, equity risk premiums remain low in our view, although a cyclical rotation does offer potential investment opportunities. Elsewhere, falling global bond yields influence a reduction in duration across our fixed income portfolio amid diminished returns. Against this background, we choose to “stay in the saddle” from an investment perspective and await better opportunities to add risk.

Macro themes driving our views

Growth remains relatively constructive

• Leading economic indicators suggest positive, albeit slowing, global growth.
• Global growth is stronger in services whereas manufacturing remains sluggish.
• Market volatility is not likely to lead to slower growth by itself, as labor market dynamics remain key across regions.

Inflation risks are more balanced

• Significant progress has been made, although it has been bumpy, and inflation is still above targeted levels.
• Elevated services inflation is normalizing alongside labor markets.
• Core goods inflation has already normalized, but higher freight costs may offset this.

Divergent policy cycles

• More central banks are likely to start cutting rates soon, but with a greater divergence of outcomes likely.
• Inflation progress allows policymakers some leeway to balance growth and inflation objectives.
• Central banks remain cautious and will seek data that confirms disinflation before acting.

Portfolio positioning themes

Balance of risks across assets

• A constructive macro environment is typically associated with strong markets, supporting a tilt toward riskier assets.
• Extended sentiment and positioning have moderated, but equity risk premiums remain low, particularly given seasonal uncertainty.
• Policy changes may offset growth and inflation surprises, suggesting the collective mix is more supportive.

A changing equity landscape

• US equity earning growth is rising and breadth is improving.
• Diminished conviction on the growth outlook for Europe ex-UK stocks, but more positive on UK equities due to an improving macro backdrop.
• Emerging markets ex China remain our preferred region, notably Asian economies, amid strong semiconductor demand.
• We continue to find Canada and Pacific ex Japan less appealing due to relatively weak macro and corporate fundamentals.

Less attractive yields for bonds

• Lower yields diminish the return potential from global bonds, influencing a further reduction in our duration preference among government issues.
• Easing cycles are likely to continue for Western economies, although we find market expectations to be excessive in some cases.
• Sustained growth supports some optimism toward riskier assets such as high-yield corporate bonds, which we prefer to investment-grade issues.
• We see value in elevated levels of real yields, balanced by caution around ongoing market volatility.