DPMS Portfolio Commentary June 2024

Executive Summary

• With a more positive outlook towards the UK and Europe compared to the US, the Vizion Wealth investment committee has increased exposure to UK and European mid and small-cap equities and, due to high valuations, slightly reduced exposure to US large caps. This is through greater allocation towards JOHCM UK Dynamic, Chelverton UK Equity Growth and Marlborough European Special Situations.
• We expect the US economy to remain strong and for inflation to remain higher than other regions. Therefore, we have removed our allocation to Dodge & Cox Global Bond, which has a higher allocation towards US bonds, in favour of Meridian Euro Credit.
• We have replaced Fidelity Asia Pacific Opportunities with M&G Asian, which more effectively captures our preferred investment themes across Asian and Emerging Market equity.

Whilst inflation has proved to be a little sticky year to date, the ECB have become the first Central Bank to cut rates from 4% to 3.75% on June 6^th, although they have confirmed that they will follow labour and earnings data before committing to further cuts in subsequent meetings. It is forecast that the Bank of England (BoE) will follow with rate cuts in Q3 and The Federal Reserve (The Fed) after that in Q4, though similarly both Central Banks will be following economic data closely before committing to a decision. We expect this to result in bond yields falling and capital prices increasing, as they move in contrary motion, resulting in a more positive picture for longer-duration fixed interest and smaller company investments due to their sensitivity to interest rate cuts. However, we do expect US inflation to remain higher at around 3.5% in the short-term due to their well-supported economy and stronger corporate earnings results.

Source: Bloomberg, J.P. Morgan Asset Management. Expectations are calculated using OIS forwards. Taken from JPMorgan Daily Guide to the Markets – UK, Data as at 17/06/2024.

Given the more positive outlook for the UK and Europe, including expected rate cuts and comparatively cheap valuations when comparing to the US, we have further increased our allocation towards UK and European small and mid-cap equity funds. This is through the JOHCM UK Dynamic, Chelverton UK Equity Growth and Marlborough European Special Situations funds through a reduction in US equity. Whilst we do expect that US equities will continue to provide solid returns from corporate earnings, we are more optimistic for future upside from smaller & mid-sized companies in the UK and Europe given that US equity valuations appear expensive and potentially less attractive to investors on a future earnings perspective.

Source: BLS, Eurostat, LSEG Datastream, ONS, JPMorgan Asset Management. Core inflation excludes food and energy in the US, and food, energy, alcohol and tobacco in the Eurozone and the UK. Taken from JPMorgan Daily Guide to the Markets – UK, Data as at 17/06/2024.

We have also removed our allocation to US bonds through the Dodge & Cox Global Bond and reallocated towards European bonds (through the newly introduced Meridian Euro Credit fund) and UK/European mid/small-caps as mentioned above. We expect that The Fed will need to wait for a longer period of time to see more encouraging inflationary and labour market data that will justify a rate cut. The ECB and BoE, on the other hand, are much closer to their 2% inflationary target (2.6% and 2.3% respectively) and will likely cut rates sooner with one eye on economic stability. We therefore expect UK and Euro bonds to offer a more favourable environment due to the expectation of earlier and possibly more severe rate cuts.

Asian equity performance has started to pick up as investors are starting to believe that the Beijing government will indeed do whatever is required to support the Chinese economy. The continued risk premium of the Chinese property market remains, with more policy support expected to be required to salvage the struggling sector, though there does appear to be more of a defined policy shift that may lead China towards the road for recovery. India is set to continue with Narendra Modi’s pro-business Bharatiya Janata Party (BJP) as Prime Minister for a record 3^rd term, though this time with a coalition government instead of an outright majority. We expect that India’s growing middle class and larger position in the global economy & supply chain will translate to continued GDP growth acceleration.

Source: LSEG Datastream, World Bank, JPMorgan Asset Management. Taken from JPMorgan Daily Guide to the Markets – UK, Data as at 17/06/2024.

Japan has struggled slightly after a successful Q4 2023 & Q1 2024 due to concerns that a weakening Yen (JPY) will put pressure on Japanese consumers and businesses alike. A weaker JPY would mean that import costs will rise and therefore put pressure on corporate balance sheets and household expenditures. Because of this, The Bank of Japan have had to put a small rate hiking cycle on hold until inflationary data better supports their shift towards growth after decades of stagnation.

Source: BoJ, Japan Ministry of Health, Labour & Welfare, LSEG Datastream, JPMorgan Asset Management. Core inflation is defined as excluding fresh food and energy, as preferred by the BoJ. Wage growth is an average of scheduled payments across all industries. Taken from JPMorgan Daily Guide to the Markets – UK, Data as at 17/06/2024.

The Vizion Wealth investment committee has introduced a new Asia Pacific ex-Japan fund, M&G Asian, to replace Fidelity Asia Pacific Opportunities. The fund comes with a host of qualitative ratings, better captures our preferred investment themes whilst retaining a good level of sectoral & geographical diversification and maintains our overall preference for balance in Style across Asia Pacific ex-Japan, Emerging Markets and Japanese equities.

Our approach to cash remains the same – whilst cash rates remain high, we still do not consider it to be worthy of a larger allocation in the long-term for our portfolios. Global economic growth forecasts look to be improving as yields fall, therefore we prefer to deploy our available Cash towards growth opportunities.

That being said, banks do remain competitive in their offerings of around 4-4.5% for instant access accounts, around 4.4-5% for 1-year fixed rates and around 4-4.5% for 3-year fixed rates, these rates are being reduced in line with interest rate expectations. Transact, as our platform of choice, are the only platform in the market to pass on all interest on overnight client cash earned from 7 major banks and this returned 4.94% AER for instant-access cash savings in May (offering full FSCS protection for each bank), please let your adviser know if you wish take advantage of this. Adviser fees are not typically charged on cash within designated cash wrappers.

Source: Transact ‘Pooled Cash’, Data as at 17/06/2024. The rates shown are the annual equivalent rate of the interest earned by the cash Transact holds on behalf of investors over the past months. The interest rates shown are not guaranteed to remain the same and will fluctuate with market conditions. This in turn may reduce the underlying rate of return on any cash held.

Overall, the changes to the portfolios are tilted towards a level of optimism for rate cuts in the UK and Eurozone in the near future. We retain our tactical biases towards what we deem to be stronger sectors within each geographical region, as we look towards the next set of rate cuts from Central Banks. Our portfolios remain well-positioned for long-term growth by focusing on potential opportunities in both the equity and bond sectors. If you would like to discuss any aspect of your investment portfolio or risk profile, please contact your financial adviser.

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The information contained in this article is intended solely for information purposes only and does not constitute advice.  While every attempt has been made to ensure that the information contained on this article has been obtained from reliable sources, Vizion Wealth is not responsible for any errors or omissions. In no event will Vizion Wealth be liable to the reader or anyone else for any decision made or action taken in reliance on the information provided in this article.