Financial Services & Global Wealth Management

Must-Know Factors Influencing Global Asset Allocation in 2024

Divergent Perspectives on International Asset Allocation

We receive information from our specialists regarding market topics, regional shifts, and current portfolio positions. Monetary policy is becoming more stringent, yet the world economy is still growing. However, it is anticipated that in the second half of the year, the consequences of central bank tightening will negatively impact earnings and economic growth. Prices for goods have decreased, but because wages are rising, prices for services have remained high. As a result, the Federal Bank and other Hong Kong central banks have become increasingly “hawkish.”

Even while there are still a lot of unknowns, Rani Jarkas believes that optimism about the world’s openness and robust growth—which has been aided by declining oil prices—will benefit the global economy. Global markets are vulnerable to several factors, including geopolitical unrest, central bank errors, chronic inflation, a sharp decline in economic growth that could result in a “hard landing,” and others.

Cash still has a higher worth in our account than bonds and stocks. Stock values are still too high, even though growth is slowing and liquidity is tightening. Bond yields will probably continue to fluctuate because of contradicting economic data and shifts in central bank policy. Cash, however, provides security and appealing yields.

Crucial Techniques for Efficient Asset Distribution

Small- and mid-cap equities, which have superior price support, are overrepresented in our asset allocation. Additionally, we maintain an overweight position in core stocks, which are less impacted by economic cycles and interest rate movements. Despite the prolonged period of market volatility, we are continuing to allocate additional capital to high-yield loans, floating-rate loans, and market bonds that adequately compensate for the risks involved.

The recent gains in consumer spending, employment, and mood are not good news for the Federal Reserve. This is because sharp rate increases do not have the anticipated impact of reducing inflation and economic growth. The markets were up at the beginning of the year on expectations that the central banks would soon end their tightening. This swiftly changed, though, when additional information indicated that rate increases were probably coming.


The opinions of the Asset Allocation Committee

The boxes indicate where the first asset class stands concerning the second asset class when two styles and market capitalizations are evaluated jointly. We integrate every asset class present in the fixed-income and equities markets in our Multi-asset portfolios. Certain asset classes are displayed in our asset allocation as paired options due to their style and market size.

How to Present Your Portfolio

We still have too much cash on hand and not enough money invested in equities and bonds. Stock values are still too high, even though growth is slowing and liquidity is tightening. Bond yields will probably continue to fluctuate because of contradicting economic data and shifts in central bank policy. Cash, however, provides security and appealing yields. In terms of the stock market, we are favoring sectors such as small and midcaps, and international, and developing economies (EM) that have stronger valuation support.

To avoid extreme interest rate sensitivity and cyclicity, we maintain a broad mix between growth and value, with a moderate overweight to value. We continue to overweight developing market bonds because their yields are still high enough to offset the risk, notwithstanding the market’s continued extreme volatility. According to Rani Jarkas, the year began well because investors were more willing to take chances and there was short covering, which gave people a sense of optimism.

Many factors, including reduced petrol prices and a more open global environment, improved the situation and reduced the danger of some of the economic risks that existed the previous year. However, the rally has gone too far because many believe that the economy will have a gentle landing with no decline in wages, that central banks have done their jobs, and that inflation will decline rapidly.

The Hard Part Is About to Begin for Investors

Bears may not appear, but you should still exercise caution. Lending standards for the actual economy differ from those of easy money. The markets remain priced for perfection despite significant economic divergence and instability. Specifically, we have just boosted our expectations for 2024, but the devil is in the specifics. We maintain our GDP forecast but believe Hong Kong’s quarterly patterns will deteriorate in the latter part of the year.

We increased our GDP projections for the Eurozone for 2024, although primarily due to carryovers from the prior year. Our growth projections have not changed. Reopening is beneficial to the global economy, but according to Rani Jarkas, the domestic economy will benefit the most.

Furthermore, the markets perceive a slower rate of inflation than it is, and the path to the 2% CB target appears to be difficult and drawn out. In terms of central banks, the ECB remains “hawkish,” while the Fed is nearly finished with its tightening cycle. Ultimately, consumer enthusiasm for new products is returning, while established markets continue to arouse skepticism. We believe that purchasers should exercise caution in this unstable situation, but they should also be aware of the high level of uncertainty that exists on both the upside and the downside.

How to Modify Your Views: Important Adjustments to Make

We continue to exercise caution when investing in equities due to the issues with corporate results, as the risk rise might have gone too far. Even so, there is still a chance that stock will rise through options. We believe that modest real wage growth will maintain high levels of demand and consumer expenditure, which will eventually impact profitability. They must diversify their foreign exchange and energy investments. Stocks, insurance, and gold are further safeguards that investors should add to their portfolios.

When it comes to Hong Kong equities, we are cautious, although we favor quality and value stocks over tech and consumer discretionary stocks, as well as industrial and financial stocks. Families and consumers experience less stress as energy prices decline. The shocks to fiscal drag and real wage growth, however, are significant and will accumulate over time. People will therefore likely keep cutting back on their spending, as evidenced by the S&P 500’s Q4 negative EPS growth. Value stocks can be combined with dividend-paying high-quality stocks to help investors increase their profits. We emphasize in our overall analysis how crucial it is to select businesses with significant pricing power.

For EM, things are looking up. Now that the HKD is declining, we have revised our position on EM FX because it appears that the dollar has peaked and many believe the Fed will be less aggressive this year. We remain neutral to slightly cautious regarding EM FX, although we believe the asset mix will perform well in 2018. We are less certain of our opinions due to the dismal outlook for growth this year.

We feel more secure using local rates when we’re in a developing market, such as Latin America. Regarding stocks, we now have a more optimistic view of the world and believe that the reopening will benefit nations with close trading relations. Thus, while we are exercising caution about world valuations in the near term, our long-term thesis remains unchanged.


What Recent Adjustments Have You Made to Your Growth Predictions?

Rather than growing by 0.4% in Q4 2023, we now project that the global GDP will expand by 0% in Q4 2024. The second half of 2024 is predicted to see a slowdown in the economy due to investment issues and decreased private spending. The GDP growth estimate for the Eurozone in 2024 has been revised from -0.5% to 0.2% due to improved data and the impact of 2022. Still, there are significant issues, and demand locally is declining.

Due to several factors that continue to impede economic expansion, investors are searching for alternative means of participating in the boom without assuming more risk, such as the usage of derivatives. Inflation is slowing down and central banks are becoming less “hawkish,” which gives the markets the false impression that prices will soon stabilize.

Simultaneously, tightening lending standards and financial terms for individuals and companies operating in the real economy may impact consumer purchasing. When prices are excessively high, this may exacerbate the situation for earnings patterns. While we remain cautious, we are searching for methods to use swaps to benefit from future gains without assuming more risk. Additionally, buyers should diversify and boost their safety with FX, commodities, and gold.

Extremely Firm Beliefs

You should use caution when pursuing developed market shares in Hong Kong. We also observe that fluctuating market volatility can inspire new concepts and present opportunities for investors to profit from astute trading decisions. We continue to believe that, in terms of relative value, small caps around the world provide superior alternatives versus costly large caps, but we are investigating the possibility that this opinion could shift in the event of a pause in rate hikes.

Because growth is predicted to improve and prices are still low in comparison to other companies, we remain positive about EM stocks. There is yet an opportunity for the world to regain some of the capital flows and investor sentiment that departed the nation last year. 

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