This note contains an overview of our market views, what we are watching, and our portfolio strategy. These developments may not mean changes to your portfolio so please contact your Client Advisor for the latest update on your portfolio.
At a glance
- Last week's US inflation data came in slightly lower than expected, which was welcome by markets. Equities, bonds, and currencies all performed well across the week leading to positive performance in our flagship portfolios.
- Looking in more detail, the quality growth aspects of our equity positions – such as US tech – performed well. These growth stocks tend to be more sensitive to interest rates, so they would have welcomed the lower-than-expected inflation data. After all, lower inflation means that the US Federal Reserve (Fed) may be close to pausing its interest rate increase cycle.
- US producer prices barely rose, providing investors with some extra relief that the peak in rates could be close. Following these inflation reports, bond yields fell, and prices rose, which was positive for our fixed income positions.
- We've recently diversified our portfolios by allocating capital to hedge fund strategies. These delivered neutral returns last week, showing their value in reducing risk and enhancing portfolio diversification.
Past performance is not a reliable indicator of future returns.
How we’re positioned
What we’re watching
- Given market headwinds and macroeconomic uncertainty, our flagship portfolios hold a higher-than-normal exposure to high-quality government bonds. In turn, we hold fewer equities and riskier bonds than normal.
- We continue to take profits in strongly performing equity segments where valuations appear stretched. We also hold more defensive positions such as low volatility equities in the US and Europe, and US dividend equities.
- Our strategic positioning and equity selection continue to be tailwinds. However, our more cautious near-term views and diversifying fund positions (US defensive value) have been headwinds.
- Taken together, we believe our overall asset allocation is a sensible combination to cushion possible downside risks in challenging markets. Our strategic exposures capture the rising trend in equity markets; our tactical tilts dampen some of the upside but also act as a mitigating factor should markets turn.
- Elsewhere, we are keeping our position in Asia-Pacific equities including Japan. Asia-Pacific equities have underperformed in the first half of the year, though we think prospects for further stimulus and compelling valuations make them attractive. Japanese equities on the other hand have delivered solid performance from a tactical point of view and we believe they have further to go.
- This week, we’ll closely watch US retail sales and housing data for the latest update on how resilient the economy is.
- The Fed is in its blackout period ahead of the July meeting, which means that there are no scheduled speeches from its monetary policy committee. At that meeting, the latest data and economists’ consensus suggest that the Fed may raise rates by 25 bps but keep its cards close to its chest on future rate increases. This means the timing of the pause in the central bank’s rate tightening cycle is a moving target, though we think we’re probably close.
- Also, we're keeping an eye on the UK due to strong wage growth and the potential for another 50 bps Bank of England rate increase especially if this week’s inflation data comes in higher than expected.
- Overall, we expect that ongoing central bank tightening will continue to negatively impact economic growth in the second half of 2023.
Data as of 17/07/2023. Source: Bloomberg. Note: The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used.
Past performance is not a reliable indicator of future return
Information correct as of 17 July 2023.
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