Changing seasons, changing risk and reward dynamics - we adjust portfolio exposures

What a difference a month makes. The mood in markets has lifted amid signs of solid US growth, the Fed’s bumper rate cut, Chinese stimulus and fast-falling inflation in Europe. Equity markets hover around all-time highs and bonds have repriced significantly. Risk and reward dynamics have shifted across asset classes, and their portfolio diversification properties have also changed. I think equities will be constrained near-term by stretched investor allocations, full valuations and a key event risk – the US elections – just around the corner. But the relative appeal of credit has risen with rising yields, despite spreads remaining tight versus their respective benchmarks.

Our Investment Committee took stock of the recent evolutions and raised our allocations to investment grade and high yield credit, as we seek to capitalise on the high yields on offer in these segments. We have also shifted regional equity allocations from the UK to Japan, where we expect stronger earnings growth. Gold has of course made strong gains both recently and year-to-date, resulting in corresponding gains for clients’ portfolio holdings. We now see an improved outlook for the metal based on both cyclical drivers – falling real rates and a more neutral US dollar – and structural ones – notably central banks increasing gold reserves to diversify away from the dollar. We have therefore lifted our 12-month price target to USD 2,900/ounce and raised portfolio holdings to overweight. Of course, gold also offers a hedge against geopolitical risks, which remain a key reason for our current balanced investment approach. Overall, our portfolios’ exposure to risk remains broadly neutral, and their year-to-date gains are strong. We are now preparing our 2025 Outlook, and our annual review of long-term expected asset class returns. These will inform our review of strategic portfolio allocations – the underlying framework and anchor of our portfolios, responsible for delivering the bulk of returns for clients over time. Meanwhile, we will continue to seize tactical investment opportunities as we look ahead to a tumultuous final few months of 2024. There is no room for complacency as markets prepare for the main political event of the year, the US election, which is just around the corner and continues to look like a coin toss. Our CIO Office Viewpoint this week will explore the ramifications of a potentially contested US election result, as well as assessing budget risks in France and the UK. Stay tuned for a whirlwind coming few weeks.