This note contains an overview of our market views, what we are watching, and our portfolio strategy. Any reference to portfolio positioning relates to our flagship discretionary portfolios. Clients with bespoke or advisory portfolios should consult their Client Advisor for the latest update on your portfolio.
Geopolitical tensions not a source of concern for financial markets
We’re not yet into the festive season but markets were relatively quiet last week and could be again this week, as the economic calendar is relatively light. However, there were some geopolitical jitters. Tensions flared up between Russia and Ukraine, causing a reaction in the commodity market. Gold prices edged back closer to their previous high at USD2,800/oz, and oil prices rose too. We are strategically exposed to broad commodities and gold as diversifiers and to mitigate the risk of geopolitical tensions. However, the relatively muted reactions in other asset classes suggest that markets aren’t concerned about a serious escalation of this conflict.
US equity markets continue to rise
Both US equities and the dollar posted positive returns last week, bolstered by strong business activity data. We expect US economic growth to continue. This is why we own more US equities relative to our long-term asset allocation and recently bought an equal-weighted US equity index, giving greater emphasis to cyclical sectors, such as industrials and financials. The equal-weight index reduces the concentration in the tech sector, although we continue to value it for its growth and earnings potential. We think the incoming US Administration’s pro-growth policies, such as tax cuts and deregulation, may also boost earnings in sectors such as industrials and financials.
Europe catches the first cold of the season
It wasn’t the first snowflakes covering France, Germany, and Luxembourg that caused European markets to catch a cold last week, but the release of softer-than-expected economic activity data in the eurozone. This was the catalyst for the EUR/USD to break below USD1.05/EUR after several quarters. Over the short term, combined with the dollar’s ‘Trump trade’, which is positive for the US currency, the EUR/USD could drift lower towards USD1.02/EUR. Nonetheless, it’s unlikely to go beyond parity as the dollar’s recent rally is overstretched, in our view, and the fundamental outlook further out isn’t positive, given a wider fiscal deficit and higher government debt.
Sterling also weakened on disappointing economic data, even though UK inflation slightly exceeded expectations, potentially making the Bank of England reluctant to cut interest rates again this year. The rise in consumer prices reflects an unfavourable comparison from last year’s energy prices, while core inflation, which strips out volatile components, such as food and energy, remains sticky. Like the euro, sterling could drift lower towards USD1.20/GBP in the short term, before stabilising.
Given the weaker-than-expected economic data, European equities underperformed last week. We recently reduced our European (excluding UK) equity exposure back to neutral to buy the above-mentioned equal-weight index in the US, given the diverging growth dynamics in Europe and the US.
What to watch this week
October’s US personal consumption expenditures price (PCE) index, the Fed’s preferred measure of inflation, is out on Wednesday. We don’t think we’ll see any surprises following the uneventful October consumer price inflation data two weeks ago. This is a different measure that tends to anticipate the PCE report. Eurozone inflation is also due (Friday) and, like in the UK, could have ticked up in October just above the European Central Bank’s (ECB’s) target. It’s unlikely to alter our view that the ECB will cut interest rates again in December, given economic weakness.
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Information correct as of 25 November 2024.
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