DPMS Portfolio Commentary
Now that all developed markets have started cutting interest rates, we are looking forward to a more accommodating period of easing monetary policy heading into 2025. Further cuts are expected over the next 12 months as the era of higher interest rates has been declared over by The Federal Reserve (The Fed), Bank of England (BoE) and European Central Bank (ECB).
Executive Summary
- We expect that The Fed will continue their rate-cutting cycle in 2024 with rates forecast to fall by almost 2% over the next year. We also expect US interest rates to fall quicker and with greater magnitude compared to other developed markets, which could cause the US Dollar to devalue against other currencies. Based on this, we have re-introduced GBP currency-hedged US bonds to benefit from expected falling bond yields and possible increasing capital values. This allocation comes from a reduction across the board from GBP and EUR Bonds to soften our bias for European fixed interest.
- The Eurozone is currently facing some economic difficulties (namely from Germany and France) with the possibility of recession looming; therefore, we have slightly reduced our European equity allocation across the board in favour of other areas.
- After August/September’s Tech sell-off, we now find that some of the Magnificent Seven are more reasonably valued and still carry the AI theme (such as Microsoft and Alphabet). Combined with the expectation of further rate cuts, we have therefore reallocated the European equity reduction towards US large-caps via US index funds.
- Despite some recent positive market movements in China brought about by the boldest stimulus from China in years, we still expect there to be structural issues facing the Chinese economy. We have therefore slightly reduced our allocation from our more China-heavy Emerging Markets funds and reallocated towards Indian equity which accesses the fastest- growing emerging economy.
- We retain a medium and long-duration focus on our fixed interest investments to benefit from expected base rate reductions over the next 12 months across all developed markets.
Macro-Economic Summary
Global inflation continued to reduce throughout Q3, and is now much closer to the 2% target set by many developed economies’ central banks. This has allowed central banks to begin their respective rate cutting cycles, with two 0.25% cuts from the ECB (down to 3.50%), one 0.25% cut from the BoE (down to 5.00%) and one 0.50% cut from The Fed (down to 4.75-5.00%). We expect this to continue to be supportive for bond markets and equities as future earnings prospects improve with lower borrowing costs.
The ECB has continued its rate-cutting cycle to ease financial conditions, though worries are emerging of weaker Purchasing Managers’ Indices (particularly for manufacturing) and stickier-than-expected services inflation causing a decline in spending and business activity. This is forecast to particularly affect Germany and France, as the manufacturing powerhouses that provide c. 40% of Eurozone manufactured goods between them, which could drag the rest of Europe towards recession. That said, financial conditions are easing and the labour market is starting to loosen, but the ECB may have a difficult road ahead of them as they attempt to delicately navigate interest rates towards a softer landing.
Following on from August/September’s US tech sell-off combined with the unwinding of the USD/JPY carry trade, Tech valuations have become more reasonable. Despite being higher than the long-term average price-earnings ratio, the market and general commentary suggests higher valuations are justified due to higher earnings growth expectations brought about from increased activity in AI-related industries. The trend is expected to continue which could have a longer-term impact on productivity and labour. Combined with the more accommodating picture for US interest rates, US mega-cap tech companies could continue to outperform for a period of time.
Based on the above, the Vizion Wealth Investment Committee has reduced exposure to European equities across the board, reallocating towards US index funds with a greater level of allocation towards US large-cap and the tech sector.
We do not expect US politics to be much of a driver for change at present. The market currently expects Kamala Harris to win the election over Donald Trump albeit by a small margin. Regardless of who the president will be, it is anticipated that the house and senate will be held by different political parties and therefore passing legislation will be more difficult without bi-partisan support. We expect the main driver, as it has been for the past 3-4 years, to be interest rates and inflation.
Similarly to the Eurozone, the UK has seen loosening of monetary policy and the labour market due to rate cuts, falling wage growth and a greater participation in the labour force. Inflation remains close to the BoE target, although stickier services inflation is delaying quicker and/or higher rate cuts. The key difference between the Eurozone and the UK is that PMIs are rising for both services and manufacturing with GDP growth also expected to be boosted for 2024 into 2025. We see this as good reason to remain optimistic about the UK equity market, particularly in mid and small-caps as further rate cuts come to the fore.
Whilst China’s benign growth, lack-lustre domestic demand and structural property market problems continue, a recent and surprising stimulus package has dominated market news over the last week. The package of positive monetary measures was introduced alongside some fiscal promises later in the week, interpreted as a big bet placed by the Beijing government that it will halt its economic slowdown. This led to a big equity market reaction as Chinese stocks soared with their highest single-week jump since 2008. However, the stimulus is not a guaranteed fix as property market issues, lower GDP growth & inflation and geo-political risk may continue for some time.
Given the strong growth dynamics of the economy, we expect the Indian stock market to continue to appreciate over the long-term due to the potential of a large level of urbanisation and the rise in the earnings of the middle class, a relatively stable political situation and India’s rising position in the global supply chain. Therefore, based on the above regarding China and India, the Vizion Wealth Investment Committee has agreed to slightly reallocate from emerging market equity funds with higher allocation towards China, in favour of Indian equities.
With rate cuts now firmly implemented and expected to come relatively regularly, bond yields have decreased and capital values have increased. It is expected that developed market Central Banks will continue to cut interest rates, with US and Europe leading the way. The US Fed is forecast to make the steepest reductions in interest rates, which will likely put downward pressure on the US Dollar and weaken compared to other developed market currencies. Based on this, we have lightened our Sterling bond bias to allow for the introduction of a currency-hedged US corporate bond fund.
Our approach to Cash remains the same – whilst Cash rates remain high, though decreasing as Central Banks are expected to cut rates over the next year, 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 in both fixed interest and equities.
That being said, banks do remain competitive in their offerings of around 4% for instant access accounts, around 3.8-4.4% for 1-year fixed rates and around 3.9-4.1% for 3-year fixed rates, although 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 4.74% AER for instant-access cash savings in August (offering full FSCS protection for each bank), please let your adviser know if you wish take advantage of this. Adviser fees are not charged on designated cash wrappers.
Overall, the changes to the portfolios are tilted towards a period of expected Central Bank rate cutting, particularly in the US which we expect to favour both bonds and equities, over the next year. We retain our tactical biases towards what we deem to be stronger sectors within each geographical region, as we look towards the continuation of the rate-cutting cycle across all developed markets. Our portfolios remain well-positioned for long-term growth by focussing on potential opportunities in both 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.
DPMS Portfolio Commentary October 2024
Now that all developed markets have started cutting interest rates, we are looking forward to a more accommodating period of easing monetary policy heading into 2025. Further cuts are expected over the next 12 months as the era of higher interest rates has been declared over by The Federal Reserve (The Fed), Bank of England (BoE) and European Central Bank (ECB).