Diversification
5 min read 11 Mar 24
We added to US and Japanese equities in the Passive, Hybrid and Global ESG Themes portfolios. We reduced European investment grade and US treasury bonds. The changes were reflected in a rebalance on 8 March 2024.
We think the environment is good for stocks and expect them to outperform bonds over the next six months. Economic growth in the US is humming along and company earnings for the final quarter of 2024 were better than expected. In the US and Japan, expectations for company profits in 2024 have become more optimistic. Interest rates are circa 2% above inflation; for example, in the US the Federal Reserve has set its interest rate at a range of 5.25% to 5.50% pa and the US consumer price index (CPI) rose by 3.1% in the previous year (January 2023 to January 2024). We don’t think there is a need to cut rates right now, however investors will take comfort that if economic growth were to slow there is plenty of room to lower interest rates.
We aren’t negative on bonds but we think the environment is better for stocks. In the US, the economy isn’t slowing significantly, unemployment is low and wage growth was 5.72% pa in the most recent data report (January 2024). The yields on bonds have fallen since October 2023, and we think further falls are dependent on central banks like the US Federal Reserve reducing interest rates. That may happen later than expected, given the solid economic backdrop. We have reduced our allocation to bonds as a result.
We did not add new funds to the Passive or Global ESG Themes models.
We expect stocks to outperform bonds over the next six months given solid economic growth, wage growth and inflation. Our positive view on equities and the attractive yields on bonds means we think multi-asset portfolios will outperform cash rates this year
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