Global Asset Allocation - Part 2 of 3. Portfolio weighting for 2024.

TOPICS covered: 2024 Asset Allocation breakdown……..The Fed pivot has formally begun…..The Us is still at or near full employment with slightly increasing participation rate (this is a structural issue which we have covered before)......BUT markets have almost fully discounted the impact of the pivot…..Equity and bonds are now overbought, short-term..…However, longer-term, we increasing exposure to equities and bonds in 2024……..Within equities, the UK gets a boost as cyclicals/commodities take advantage of a weakening USD…….Long duration bonds should perform well as the ‘abnormal’ inverted yield curve normalises……

This was the week that the Fed formally called the top in the current interest rate cycle and began to advocate for lower rates going forward into 2024. We have been suggesting for sometime that inflation was no longer a concern and that the Fed’s key mandate to reduce inflation using the one key tool they have has officially worked. Inflation earlier in the week was muted with no significant outlier in terms of price moves and unemployment remained stubbornly low for all the structural reasons we’ve described in the past.

Even labour participation rate slightly increased as unemployment registered another full employment figure of 3.7%. The return to work of the auto industry would have been a contributing factor but nonetheless, the macro figures released this week could not have been more suggestive to the Fed that interest rate hikes were absolutely no longer part of the agenda and in fact no member of the Fed rate setting committee is now in favour of a rise in rates. The first time since this rate cycle began.

Having sung the praises for a risk revival (we have been doing so for some months), a word of near term caution. Equity indices have entered overbought territories in both the US and Europe. The VIX volatility Index is at a pre-Covid low and the 10-year treasury bond yield has fallen over 120bps in just the last few weeks. We believe that duration investing in sovereigns is sensible for 2024, however our assumption is that the US 10-year yield would trade down to 3.5% over the year. So far, in a matter of weeks, this has almost come to pass with the yield on 10-year treasuries down to 3.9%. As always with markets, reaction has been swift and overdone. Expect some consolidation and weakness near-term. The medium-term 2024 story of recovery with falling rates and robust labour markets stays intact (at least in our opinion).

Last week we set out our stall for our macro-economic assumptions for 2024. This week we will aim to provide an asset allocation model which best reflects those macro assumptions and next week, we will dive into each allocation decision and discuss our rationale for sector, geographic and asset type exposure. The allocation is compared to a typical balanced global portfolio as prescribed by MSCI’s Personal Investment Management and Financial Advice Association (PIMFA) Index. This Index was last updated end November 23.

The first element to focus on is the country bias. This is a balanced global portfolio for a UK resident. In our opinion local biases make little sense unless one is a US resident given that over 50% of the world’s liquid assets are to be found there. The UK accounts for less than 3% of global GDP. A 20% benchmark allocation makes little sense. Anyhow, we have upped our allocation heading into 2024 to the UK largely thanks to our assumption of a weaker USD which should bode well for cyclical assets. The FTSE100 Index is replete with global energy and commodity stocks. All figures in yellow in Table 1 represent our exposure changes since our last positioning in Q3 23.  Tables 3 demonstrates our positioning for 2023 back in December 22 and Table 2 is our new exposure set for 2024.

Overall, our equity exposure has been upped still further. Our base case is that economies globally recover slowly in 2024 with rates declining from H2 onward. The US is by far the most expensive equity market of the developed set, however, the recovery is most likely to take hold there before anywhere else and the out performance, we believe, will continue. The US also acts in a defensive manner too. If the base case does not work through and a recession comes in, the mega technology group are likely to keep the lead with investors heading back into the safety of structural growth and free cash generation. We’ve also upped our Japan exposure on strong valuation backing and reduced China exposure as growth is likely to remain lacklustre next year.

We have upped our exposure to duration in the sovereign bond market. We believe that the ‘abnormal’ inverted yield curve begins to normalise in 2024. As this occurs, the long end of the yield curve has significant opportunity to decline resulting in significant upside to bond portfolios. Where we have reduced exposure significantly is toward alternative strategies. In large, the nature of these alternative assets were defensive market neutral or high dividend exposure.

The consensus view currently is that recession is likely to occur in the coming months and any rate reduction is likely to be a counter reaction to quell a slowdown. We believe that the strength of the labour market is likely to remain resulting in continued growth, be it slower than average, but nonetheless not resulting in recession and leading to an economic recovery into 2025 as rates fall between 100-150bps over the coming 12-15 months.

PLEASE DO YOUR OWN RESEARCH. THIS IS NOT A SOLICITATION TO FOLLOW ANY OF OUR ADVICE. THIS IS MEANT FOR PROFESSIONAL INVESTORS ONLY.