Diversification
6 min read 12 Sep 23
We’ve changed our tactical views. These changes were reflected in the portfolios in a rebalance instructed on 18 September.
Our key tactical views are:
We’re upbeat on the global economic outlook and don’t foresee a recession in the next 6-12 months. All developed economies apart from Japan have increased interest rates over the past 12-18 months. Inflation is coming down, but we don’t think it will fall to the 2% target levels soon. The markets expect interest rates to be cut in 2024, which we don’t believe will happen. We have less in US Treasuries and UK Gilts tactically. We think low unemployment and wage growth will contribute to ‘core’ inflation being above 2%. The impact of higher rates is being felt slowly, due fixed rate mortgages and bonds delaying rises in borrowing costs.
We’ve added to Japanese equities. The Japanese economy is moving to a scenario of higher prices and higher wages which we think bodes well for equities. This is because it’ll stimulate domestic demand without putting pressure on company margins. This hasn’t occurred for decades in Japan. Earnings are projected to grow about 7% in the year ahead1, which should also be a low bar to beat as the economy continues to recover. Real GDP in Japan is still below the pre-pandemic level. The Yen is inexpensive, and has potential upside versus U.S. dollar and relative to other developed market currencies. We expect this to boost earnings growth in U.S. dollar terms and GBP terms.
We have also added more to emerging market equities in anticipation of an improvement in corporate earnings and valuations. We have a positive view on emerging Asia equities including Taiwan, India and Korea which collectively make up 40% of the EM index. Taiwan and Korea have significant exposure to semi-conductor manufacturing.
We are most positive on Indian equities, so within our Hybrid models we’re implemented this by increasing our Indian equities. Indian earnings are projected to grow nearly 20%2 in the year ahead, which is among the highest globally. While it sounds higher, this would still leave company profits margins below the 2022 peak. The valuations of Indian equities are higher relative to other emerging markets, but they’ve always traded on a premium. The long-term structural case for Indian equities rests on companies shifting supply chains to India and outsourcing services. That’s happening faster than expected. Indian equities are benefiting from a rise in forward earnings estimates and we think the region is a powerful source of growth relative to other emerging markets in the coming year.
We remain positive on small and mid-cap US stocks. This view hasn’t worked as well so far this year but we think the valuations of large cap technology companies are vulnerable to some profit taking. Plus we continue to expect the better economic outlook to benefit smaller domestic companies.
Our next Quarterly Investment Outlook will be published in early October.
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