At a glance
- Risk assets continued their progression last week and generally outperformed defensive assets like bonds or gold.
- The European Central Bank (ECB) delivered what is likely the final increase in interest rates in this cycle, as we had expected. The Governing Council gave a clear signal that interest rates will now plateau for “a sufficiently long duration” to allow the interest rate increases to continue filtering through to the economy. Markets reacted well, with Eurozone equities rallying towards the end of the week, which contributed positively to portfolio performance.
- ECB President Lagarde nuanced this message by not entirely closing the door to further rate increases as inflation has taken many twists and turns in this cycle. Given rising energy prices mainly due to the recent increase in oil prices, there is a risk that inflation will pick up again. However, the further weakening of the economy and other disinflationary forces raise the bar for more rate increases in the Eurozone. The euro fell after the ECB meeting as the market acknowledged this was likely the peak in interest rates.
- In the US, headline inflation for consumers and producers rose in August, primarily due to the recent rise in energy prices in this case too. But, as core inflation (which excludes energy and food prices) fell, US equity markets also ended the week on a positive note. This supported our US equity position in portfolios.
How we’re positioned in flagship portfolios
- We are making a few changes to the portfolios to reflect our evolving views on a couple of asset classes.
- Firstly, as we are approaching the peak in interest rates, we have decided to increase our exposure to longer-dated local government bonds. Yields from these longer-dated bonds are at attractive levels and historically peak around the same time as interest rates.
- Secondly, we are also reducing our exposure to Asia-Pacific (including Japan) equities. Underwhelming growth and Chinese stimulus have weighed on broader Asia-Pacific equities, including Japan. Despite attractive valuations, the investment committee has agreed to return our position to neutral relative to our long-term strategic allocation.
- Finally, given the relative resilience of the US economy, it’s unlikely that our position in US high-dividend equities will outperform the US equity market overall. Therefore, we have decided to shift this position into the broader US equity market. However, we are keeping our defensive position in low-volatility stocks in the US and Europe to protect against any market downturn.
What we’re watching
- This week is packed with central bank meetings with the US Federal Reserve (Fed) on Wednesday along with the People’s Bank of China, the Bank of England (BoE) on Thursday together with the central banks of Sweden and Norway, and the Bank of Japan (BoJ) on Friday.
- The Fed will likely hold interest rates at 5.25-5.50%, with the market focusing on the new set of projections of the central bank. The economic resilience of the US economy means there is a risk that the Fed will signal a final increase in interest rates before the end of the year. We think the peak in interest rates is in close sight.
- For the BoE, inflation is expected to have increased in August, so raising interest rates further remains likely. However, recent comments made by Governor Bailey cast doubt on how high the BoE could raise interest rates.
- In Japan, recent remarks by Governor Ueda suggested an increased likelihood that the BoJ may opt to end its negative interest rates policy before abandoning the yield curve control. Lifting interest rates out of negative territory could come first; the BoJ has to tread carefully as it needs to achieve sustainable price increases along with rising wages. Recent wage data and negotiations have been disappointing compared to expectations, which is why doing so before the end of the year is still uncertain. This uncertainty around Japan’s monetary policy is another reason why we have rebalanced our Asia-Pacific (including Japan) equities position towards developed market equities.
- On Friday, the key purchasing managers’ indices (an important economic indicator) are likely to suggest that manufacturing and services activity is contracting the Eurozone and the UK. This is one reason why we’ve recently added to Eurozone bonds and UK gilts. In the US, these indicators should suggest manufacturing is contracting, while services have fared better so far.
Past performance is not a reliable indicator of future returns.
Data as of 15/09/2023. The Yield and P/E figures for stock markets respectively use 12m forward dividends and earnings divided by the index’s last price. For bond markets, the yield to maturity is used.
Source: Bloomberg Index Services Limited. BLOOMBERG® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”). Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve or endorse this material or guarantee the accuracy or completeness of any information herein, nor does Bloomberg make any warranty, express or implied, as to the results to be obtained therefrom, and, to the maximum extent allowed by law, Bloomberg shall not have any liability or responsibility for injury or damages arising in connection therewith Note: Past performance is not a reliable indicator of future returns.