In 2024, a resolutely "at the same time" asset allocation

  • 30 January 2024 (5 min read)

Key points

  • We expect a technical correction in the first quarter, which we believe is a good entry point to put risk back into portfolios
  • Indeed, we are optimistic about 2024 and favour US equities, developed sovereign debt, and dynamic hedging strategies
  • Our asset allocation therefore takes note of the persistent, positive correlation between equities and long-term rates: we will look for exposure to duration and equity risk at the same time
  • On the other hand, we believe that credit brings less value in a multi-asset portfolio because spreads are already tight: you might as well be exposed to pure duration on the one hand and riskier assets on the other

Ready to step on the gas, but...

We will add risk to our portfolios in 2024 by favouring US equities and extending their duration, mainly with developed market sovereign bonds. But we are cautious because the rate cut in November-December 2023 went too fast and too far, which should lead to technical consolidation in the first quarter of 2024 and offer a better entry point.

Today, the duration of our portfolios is reduced while our views are neutral on equities; we tactically reduced exposure following the strong rebound fuelled by lower real rates and investors' renewed risk appetite. We have a level of liquidity (cash is relatively well paid) that is quite high and are ready to deploy it into equities. In addition, we have reduced the growth bias in favour of the health and utilities sectors, for example.

Commodities – to which we are exposed in particular via index futures – should also benefit from the unstable and complex economic and political environment. Commodities can be of interest in a diversified portfolio in the event of increased geopolitical risk, especially as oil prices were approaching the lower end of their trading range.

Finally, we are cautious on China as the economic situation remains deteriorated in a real estate adjustment that will take time and while many investors continue to withdraw. We don't rule out coming back to it, but we're waiting for better visibility.

In short, the excitement of the end of 2023 makes us patient... but very confident!

For the first half of 2024, we favour an "at the same time" portfolio, overweight equities, particularly US equities, and sovereign debt

1. U.S. equities
We particularly like the resilience of growth and the continuation of disinflation while the peak in rates is behind us. The expansion of the rally, concentrated in 2023, leaves room for significant upside for many stocks.

2. Sovereign debt of developed countries
Monetary policy expectations on both sides of the Atlantic have gone very far and, therefore, probably too far in the short term. However, the downward trend in rates is likely to continue, on average, over 2024 as the exogenous inflationary shock is finally behind us.

3. Dynamic hedging strategies
In our view, the inflation regime is responsible for the high correlation between asset classes. We have alternated and will continue to alternate between synchronised corrections (September-October 2023) and equally synchronised rallies (November-December). Even today, core inflation is still too high to shift to a more traditional negative correlation. We, therefore, implement dynamic hedging strategies that consist of buying options when their cost is relatively low. This approach is valid in both bull and bear markets:

  • In a bear market, protection costs more than in a bull market, which is why we prefer to buy protection tactically in a bull market (because it doesn't cost much). What's the point? Buy options at a lower cost and exercise them when the market turns around in order to crystallise our gains.
  • In a bull market, to take advantage of the rally, we think it is appropriate to use leverage by going long on equities and long on duration. Thus, via futures, our exposure will exceed the value of our investment.

At this stage, we see limited interest in integrating credit into a diversified portfolio

While credit is a key segment of the fixed income spectrum, and while broadly supportive of the asset class given the resilience of developed economies, we see limited interest in integrating it into our multi-asset portfolios today with spreads already tight. When looking at valuations, we see that direct spread levels have accelerated as the Fed prepares to cut rates. Historically, credit has suffered as a period of rate cuts approaches.

However, the return of bond volatility, which has been significantly higher in the past two years than in the previous decade, offers opportunities for active portfolio management. 

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