“The US economy continued along its robust growth trajectory in April, albeit with some signs of deceleration. At the same time, persistent price pressures have consolidated the expectations of higher rates for longer”. He writes it Michael Lok, Group CIO and Co-CEO Asset Management of Union Bancaire Privée (UBP) explaining that in this context, both bonds and stocks “have seen negative returns, by -2.5% and -3.0% respectively, influencing the performance metrics of traditional portfolios to date. As for hedge funds and gold, they outperformed, recording returns of -0.5% and 3.9% respectively.”
FED, only one cut in 2024
Since the disinflation trend in the United States has been put to the test for three consecutive months – explains the expert – “our asset allocation scenarios have been adapted accordingly. Compared to the market forecast at the beginning of the year which saw six rate cuts in 2024, we at UBP now expect only one cut in December. This adjustment significantly impacts our fixed income outlook, while corroborating recent changes to our equity allocation.”
As regards fixed income, in a context with limited potential for spread compression with favorable macroeconomic prospects, the main performance driver for the asset class is mainly to be found in carry. As a result, “we have strengthened our carry strategies, increasing our exposure to high yield, moving from short-dated to intermediate-dated securities that offer superior yields. In our view, the high valuations of this asset class are justified by the optimistic economic growth prospects, which imply a high cost for an extended period.”
How bonds and stocks change
It is worth underlining – continues Lok – that current bond markets offer historically high absolute returns, with levels rarely exceeded in the last two decades (excluding crisis periods such as the global financial crisis and the Covid pandemic).
As for the equity securities, After the remarkable five-month rally that began in October 2023, global equities “suffered a correction in April, with a 3.3% decline in the MSCI World Index, attributed mainly to widespread expectations of lower interest rates. taller for longer. Despite this seasonal correction, the outlook for the end of the year for equities remains positive”.
The analysis
In the first quarter “the season of useful kicked off on a positive note in both Europe and the United States, with an earnings increase of 7.0% for the S&P 500 to date (versus the 5.1% expected at the end of the first quarter), driven mainly by large technology caps, which posted record earnings growth of approximately 35.0% year over year. Other sectors were still faced with negative average earnings growth for the first quarter, but this trend is expected to reverse in the coming quarters, justifying the expectation that sector participation will broaden.”
These developments – concludes the expert – “support our strategic choice to diversify at both a geographical and sectoral level. While in the first quarter we strengthened and diversified our regional exposure by entering the Indian market and strengthening investments in UK and Swiss stocks, in April our equity positioning remained constant throughout the month. Furthermore, we have decided to tactically moderate our negative bias towards Chinese equities, based on expected positive cyclical factors for the Chinese economy in the near term, as well as potential long-term reforms that could be announced in the summer during the third plenum of the Central Committee.”
