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Our increased US investment grade (hedged) bond exposure has been funded by a reduction in our exposure to European and UK investment grade bonds. This slightly increases our sensitivity to interest rate changes, as we have stronger conviction that Fed rates have peaked and we’re positioning for falling bond yields in the US.
Our analysis suggests that the outlook for continued outperformance of Eurozone equities is likely to become more challenged. However, there are risks in the US market given stretched valuations and our belief that expectations of Fed rate cuts are too optimistic. We see European minimum volatility stocks as a way of increasing our exposure to the Eurozone and allowing us to diversify away from the US, while keeping our slightly reduced exposure to equities unchanged. By investing broadly into Europe (rather than just Eurozone equities), we are positioned to capture any continued upside in Eurozone equities while mitigating the risks of a downturn through wider regional diversification and a focus on defensive sectors and companies.
Our overall equity exposure is still marginally reduced vs our strategic (long-term) asset allocation. Although stock markets have performed relatively well this year, we do not think it is yet the time to increase exposure to risk in our portfolios.
We maintain a slightly cautious stance on credit, mainly the US high yield market, where banking-sector stresses, tighter credit standards and rate rises will likely be most acutely felt.
We maintain our local cash balances and continue to hold gold as a strategic hedge at a neutral level relative to our long-term allocation.
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