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September 2023

Asset allocation outlook

  • Economic outlook remains poor
  • Inflation falling but no sign of interest rates being cut yet
  • Portfolio sensitivity to interest rates increased


Global equity markets experienced losses in August, with the MSCI global index declining by 3.0% in local currency terms. Emerging markets saw the most considerable loss at 6.4%, while the U.S. experienced the smallest decline at 1.8%. The U.S. ten-year Treasury yield increased to 4.22%, the highest level since 2008, resulting in a marginally negative return on these government bonds. Diverging interpretations of U.S. economic data, the outlook for monetary policy and concerns about China’s economy influenced these moves.

Following a string of stronger-than-expected reports, ranging from consumer spending to residential investment, economists have revised their GDP forecast for the U.S upward. This marks a considerable shift from the consensus view just three months ago. The third quarter will likely be the zenith of this reacceleration in U.S. economic activity. Despite the fact that real growth rarely matches the Atlanta Fed’s real-time “nowcast” estimate of 5.6% quarterly growth, it must be stated that the U.S. economy has remained relatively unscathed by aggressive tightening on the part of the Fed so far. At the same time, persistent signs of U.S. economic resilience strengthen the case for a prolonged period of higher interest rates.

The most recent job report in the U.S. indicates that the economy is slowing down. Job openings have declined, and unemployment has ticked up slightly to 3.8%. What’s noteworthy and encouraging is the moderation in wage growth, with hourly earnings increasing by 4,3% y-o-y only. Lower income (and spending) growth will alleviate both inflationary pressures and economic activity. Moreover, dwindling excess savings among lower-income households will further dampen consumer spending. The slowdown is expected to challenge the goldilocks narrative in which U.S. equity investors imagine themselves. As economic activity slows down, there will be instances when investors find it challenging to remain confident that the economy will experience a gentle deceleration rather than a more severe downturn.

Outside the U.S., economic activity is lacklustre, with factory activity around most parts of the world stagnating and filtering through a deceleration in the service sector. In the second quarter, the euro-area economy barely grew. Gross domestic product rose by only 0.1%. The rest of the year appears to be similarly gloomy. The composite Purchasing Managers’ Index (PMI) dropped to 46.7 in August, its lowest level in three years, signaling a rapid decline. Germany, in particular, is experiencing one of the most substantial declines in activity since 2009. “The darkest hour is just before the dawn”: investors still anticipate that a U.S.-driven inventory restocking cycle should help put a floor under global manufacturing production. However, expectations of the magnitude of this rebound have been tempered by the ongoing weakness in Chinese activity data.

Chinese onshore stocks faced their worst monthly drop since February (CSI 300: -6.1%). Domestically, depressed household sentiment is weighing down on private sector demand and corporate profits. Meanwhile, Chinese exports are contracting amid weak foreign demand for Chinese goods. Fixed-asset investment for H1 2023 reached a 31-month low, primarily due to weakness in the property sector, which remains a source of concern. To restore confidence, Beijing has rolled out a batch of stimulus measures, including cuts to policy loans, mortgage rates and down-payment requirements for home purchases. While this week’s published data on credit demand and inflation were encouraging, we think more concrete policy action is needed to improve Chinese equity sentiment.

While Chinese officials are attempting to jump-start the economy, most developed countries are in the midst of a bumpy landing as central banks try to tame inflation without damaging the economy. So far, the U.S. is experiencing less turbulence than the eurozone. Nevertheless, as the Fed is likely to keep rates at elevated levels for at least the next six months, we expect U.S. growth to also slow to a below-trend pace. Higher interest rates might exert a less pronounced influence on economic growth than anticipated, but this does not imply they will have no impact. We view the rising earnings expectations with some scepticism. Earnings growth for 2024 of 10% for the U.S. and 7% for Europe seems very ambitious to us. Given the uncertainties, a cautious investment approach is being maintained. The more defensive high-grade segment of fixed income offers the potential for capital appreciation as investors start shifting their focus to moderating growth. We take advantage of the higher interest rates at the long end and have decided to increase the portfolio duration.

Please find attached our last Asset Allocation Update for September.

Asset allocation outlook Sept 23

Jan-Willem Verhulst

Jan-Willem Verhulst


Email Jan-Willem

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