In the balance

In the balance

Our view on stronger US growth, central banks and geopolitical risks
Counterpoint – April 2024

The first few months of 2024 have come as somewhat of a surprise to investors. For example, US growth has stayed resilient, continuing to defy the odds of recession, so markets have had to reevaluate their expectations for the year. And we are no different. Investing is about finding the right balance between having conviction in your long-term strategy and being conscious of the opportunities in the short term. 

We manage this balance through a strategic asset allocation (‘the long term’) and a tactical asset allocation (‘the short term’). So, when you hear a wealth manager say they’ve brought a particular asset class ‘back to neutral’, it simply means that their tactical asset allocation aligns with their strategic asset allocation – at least for that asset class. I mention this because, based on the data we’ve seen, that is precisely what I and the Investment Committee have been doing in some asset classes this year.  

Daniele Antonucci

Daniele Antonucci

Daniele Antonucci is a managing director, co-head of investment and chief investment officer at Quintet Private Bank. Based in London, he’s a voting member of the investment committee. As head of research, Daniele oversees the investment strategy feeding into portfolios. He chairs the network of chief strategists, which communicates the house view on the economy and financial markets to clients and the media.

Prior to joining Quintet in 2020 as chief economist and macro strategist, Daniele served as chief euro area economist at Morgan Stanley. Earlier, he worked at Capital Economics, Merrill Lynch, Moody’s KMV and the Confederation of Italian Industry. Daniele holds a master’s degree in economics from Duke University and graduated from the Sapienza University of Rome. He’s an ECB Shadow Council member.

Reallocating from defensive European equities to the US 

At the start of 2024, we brought our equity and bond allocations back to neutral, having previously owned a slightly lower proportion of equities and more bonds. However, there are still differences between our tactical and strategic asset allocations when it comes to sectors and regions. For example, we previously owned fewer US equities compared to our strategic asset allocation. But, due to the resilience of the US economy, we’re bringing that back to neutral, while keeping a lower Eurozone equity allocation.  

We’re funding this increase in US equities by selling part of our European equities, specifically minimum-volatility European equities. In Europe, growth has been at or near zero for some time, but it’s not getting worse and appears to have bottomed out. Therefore, we think it’s unlikely that European minimum-volatility sectors (which do comparatively well when the economy is worsening) will outperform the broader European market. 


An active portfolio management approach to US equities 

You may already be aware that we recently launched the first in a range of multi-manager funds, known as our QMM Fund Range, which we’ve co-created with BlackRock. The first fund to launch is the QMM Actively Managed US Equity Fund. It’s available exclusively to all Quintet clients, from those who invest in our flagship portfolios to those in customised and advisory portfolios. This fund – as well as the others in the range – is made up of an optimised blend of leading third-party managers that aims to outperform its benchmark by combining different styles of actively managed strategies. 

The investment I mentioned above into US equities, funded by the sale of the European minimum-volatility position, has been implemented through the QMM Actively Managed US Equity Fund. As we launch future QMM Funds, we will communicate how we are implementing them in the flagship portfolios, as I’ve done here. 

An investment instrument to partially mitigate risks of a market fall 

To repeat what I said at the start of this note: investing is a balancing act. While the growth data out of the US are better, this resilience is leading to stickier inflation than expected, which in turn may lead to fewer interest rate cuts from the US Federal Reserve. While we now reflected a new, shallower rate-cutting cycle in our base case, we’ve been thinking for some time that equity market expectations are perhaps somewhat optimistic. Think about it: valuations for the US are on the demanding side, analyst earnings expectations keep rising, and there are plenty of policy and (geo)political events, including the all-important US election in November. 

To be clear, we’re not forecasting an imminent, significant equity market correction in our base case. Rather, given the above, we’ve bought ‘insurance’ to partially protect our flagship portfolios and those where client knowledge and experience, and regulations, permit, in case of unforeseen negative events in the short term. This insurance is an investment instrument that would increase in value if there was a substantial equity market sell-off within a defined range below the purchase level. It would offset part of the losses in such a hypothetical scenario. Similarly, if equities increase, the value of the instrument will fall. However, given the relatively low cost of the instrument, the loss is similar to buying car insurance and your car not breaking down. You buy it hoping you don’t need it, but it gives you peace of mind. 

Geopolitical risks and Middle East tensions in the context of our strategy 

A central theme of our 2024 outlook is a ‘fragmented world’ along more marked geopolitical lines. The thesis is that geopolitical actors with contrasting objectives can spur market volatility. Take what’s happening in the Middle East, where tensions appear to have resurfaced, as an example about how to think about geopolitical risk. Who would have thought that the week would have started with markets responding positively: oil prices fell, equities rallied, bond prices declined. That’s likely a response to the news of no further escalation, perhaps teaching a lesson to the investors who overreact.  

At the same time, one doesn’t want to be complacent either, and we’ve subsequently seen markets giving back these gains on news of a possible escalation further down the line and selling off. All this suggests that market volatility may be rising. One of the most sensible strategies to mitigate the risks of local events is to invest in a globally diversified portfolio. We can also take more specific actions in the face of geopolitical uncertainty. Ours was to buy assets, such as commodities, that can support portfolios in this environment, plus the ‘insurance’ instrument mentioned above. 

If you want to discuss your portfolio positioning or learn more about the QMM Fund Range, your Client Advisor will be happy to help. 

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