A cautious allocation for the end of 2023
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Every month, LBP AM deciphers market news in video. In September, Sebastian Paris Horvitz, Head of Research, shares his views on asset allocation in our "Vu(es) sur les marchés" feature.
Since the beginning of the year, the global economy has been full of surprises, and despite a historic monetary tightening it has proven resilient. There are today major differences between regions: in Europe, growth is decelerating much faster than expected; China is having trouble getting off the ground again; and in the United States the consumer is still holding the American economy together. But we believe that the future may not be so different for these three regions.
What are the economic dynamics for the coming quarters?
Why do we think economic dynamics are likely to be comparable in the US, Europe and China in the coming quarters? The main reason remains the restrictive monetary policy, which we believe will affect growth - albeit with delay - including in the United States. That is why we foresee a rather low growth in the United States and in Europe for the end of the year and in early 2024 .
This has led us to a very cautious asset allocation, while taking advantage of the currently very high short-term interest rates to earn very reasonable returns on our liquid assets.
Bonds, equities and credit: what forecasts?
On government bonds, we remain constructive. Indeed, we believe that key interest rates have reached - or are close to - their peak, and as we anticipate low growth, we find being selective on sovereign bonds provides reasonable returns.
On corporate bonds, we take a more moderate view. We are neutral on the asset class, with exposure to Investment Grade, i.e. the safest part. We are much more careful with High Yield, as we believe that valuations have become much less attractive, especially given the deteriorating environment we foresee.
On equities, we have been cautious for quite some time, and remain so. The low growth we anticipate, in particular in developed economies, should "finally" be reflected in earnings. This explains why we are still underweight on equities, albeit slightly. Margins could indeed keep proving resilient, so we don't want to cut ourselves off too strongly.
The same goes for our regional allocation: we hold no strong view, except for China where we are reducing our exposure due to the slower growth, save for those promising sectors whose valuations remain very attractive.
All in all, our allocation remains very cautious, the main reason for this being the poor outlook for growth, which could even deteriorate at the end of the year and early next year.