Portfolio Perspectives, July 2024

Equity market outlook looks relatively benign 

World equities reached new highs since our last edition of Portfolio Perspectives. The main driver of this move was an improved interest rate outlook in the US on the back of a better inflation report (see comments from our Fixed Income strategist below).

The challenge for equity markets is that growth data has softened across all the major regions. We have not seen this since the middle of 2022 and that was a difficult time for equity markets. However, at that time central banks in the developed world were aggressively increasing interest rates. This time round central banks are looking at cutting interest rates which can give support to equity markets.

Political developments in France continued to weigh on euro area assets and the region’s equity market was one of the weakest over the period. There is now a hung parliament at a time when, under EU rules, the budget deficit needs to be reduced. Policy logjam is likely to weigh somewhat on the region.

Sector performances were evenly spread. The ‘new economy sectors (IT and Communication Services continues to outperform but there was also a revival of the cyclical sectors (Industrials and Financials). Post the Presidential Debate in the US there was a notable increase in the probability of Republicans winning both Congress and White House (Republican sweep) and hence the prospect of looser fiscal policy (recent cuts in taxation being rolled over).

Equity markets made further progress since the last Portfolio Perspectives but largely reflecting the better fundamentals. The interest rate outlook has improved. The growth data has softened but not materially so. Meanwhile, profit performance has been very strong. Over the last couple of months, we have seen upgrades to earnings forecasts for 2024 and 2025. The performance of equity markets has been quite narrow and thus warrants some caution but in general the outlook looks relatively benign.

Bernard Swords,
Chief Investment Officer

A choppy month for euro area bond yields

The July Asset Allocation Committee focused predominantly on the macro environment that impacted both equity and fixed income markets. With the European Central Bank (ECB) delivering its first rate cute and French President Macron calling a snap election, it was a choppy month for bond yields in the euro area. Although no changes were made by the committee to the overall strategy or investment mix, the committee highlighted the importance of staying fully invested while we remain cognisant of market moves as economic and political uncertainty persists.

The month began with rate cuts coming increasingly in to focus as the ECB delivered its first cut since the pandemic, lowering their deposit rate by 25bps to 3.75%. However, ECB President Lagarde noted it will take time to gather further sufficient data, and that the strength of the labour market means the ECB can afford to take its time with the cutting cycle.

Additionally, as mentioned by Bernard earlier, the euro area experienced the effects of Macron’s sudden call for a snap election with the first round taking place the last week of June. That led to an initial large selloff among French assets, and a significant widening of the Franco-German spread i.e., a larger risk premium going into French assets. However, the spread subsequently began to narrow, and markets appear to have now fully digested the event. On the month, sovereign bonds yields in the euro area remained relatively unchanged.

The May inflation data released in June showed the slowest monthly increase in core prices (consumer prices excluding the volatile food and energy components) since August 2021. The data reignited the idea that rate cuts were still on the horizon from the Federal Reserve, with two cuts now fully priced in by the market.

Overall, our preference remains to hold bonds with slightly shorter duration than those of the market average and to overweight Corporate credit vis-à-vis Government bonds. Being underweight duration versus the Euro Aggregate benchmark continues to provide our portfolio with a layer of protection against volatility swings. 

Moyah Flanagan,
Fixed Income Strategist

Portfolio positioning: strategic switches made in Q2

We have made no adjustments to portfolio positioning in June, however over the course of Q224 there have been a number of strategic switches across both our equity and fixed income strategies.

In equities, we increased our exposure to the Technology sector, and we now have a benchmark weighting in the sector and have increased our exposure to mega cap stocks. The step-up in earnings growth in the sector that started last year has continued into 2024 and, from the indicators that we look at, this is unlikely to change until well into 2025. The sector has performed very strongly but it is reflecting that improved earnings outlook. To fund this shift, we reduced exposure to the Consumer Staples sector. With a better economic background, we do not need to be as defensively positioned as we thought at the start of the year. The Consumer Staples sector is seeing downgrades to earnings forecast as pricing pressures emerge again.

For some portfolios, we also took profit on positions within the Industrials and Materials sectors. We still like the segments, but they had become too large in the portfolios. We used the proceeds to increase our exposure to the ‘decarbonisation theme’.

Finally, we increased our exposure to Energy and Healthcare. In Energy, we increase broad sector exposure as we have an underweight position. In Healthcare we increased the exposure via the Med Tech segment.

Within fixed income, we increased our exposure to active managers in the corporate debt space and reduced our passive investments. Due to the structure of this space we have been able to find more active managers that can outperform on a consistent basis and hence add value to our clients portfolios.

Sarah Quirke,
Head of Investment Solutions