February 22, 2024
Asset allocation views: uncharted territory
Global markets enter uncharted territory after developed-market central banks break with historical trends to cut interest rates before the U.S. Federal Reserve. Global growth desynchronization will test market resilience while unlocking new investment opportunities.
Economic environment has supported risk assets, but for how long?
- A soft landing for the global economy has been the consensus so far, as global inflation declines, albeit slowly, with positive economic growth. This has been a Goldilocks environment for risk assets with stocks well ahead of bonds year to date.
- The European Central Bank becomes the latest developed-market central bank to break with historical trends to cut rates ahead of the U.S. Federal Reserve (Fed), joining Canada and Switzerland with a 25 basis point cut.
- The Fed will be carefully monitoring key economic markers, while inflation will be the primary focus. Jobs data and economic growth will also be measured, as it seeks to strike a balance between cutting rates too early and waiting too long, which could necessitate deeper cuts.
How long before cracks appear?
- Our outlook remains generally positive—reflected in an overweight in equity versus fixed income—but we remain alert to potential—hidden—market weakness.
- A string of disappointing economic data includes the lowest job openings since 2021 and GDP growth revised lower. This signals that growth in the United States, while still positive, may be weakening.
- Valuations are elevated relative to historical levels, heightening the risk of deeper drawdowns in a slowdown. On their own, however, valuations aren’t typically a good predictor of near-term market movements.
U.S. dominance continues for now
- The first half of the year has been defined by broad market participation, coupled with continued U.S. leadership. However, should economic trends continue to deteriorate, allowing for an accelerated rate-cutting cycle, certain assets with larger valuations cushions are set up well to outperform.
- European equities, currently undervalued, have seen earnings beat expectations with improving forward-looking projections. Stabilization in China could also present an opportunity going forward.
- U.S. small-cap equity valuations are near all-time lows relative to large caps, while investment-grade bonds have been challenged since late 2021. U.S. rate cuts could benefit both and the prevailing economic environment will determine which of these assets outperforms.
Source: Manulife Investment Management, June 2024. These views are updated on a quarterly basis. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. No forecasts are guaranteed.
Active asset allocation views
As high inflation and elevated interest rates have kept relative small-cap performance subdued, potential tailwinds have been building. These include improvements in manufacturing activity globally and earnings expectations that are elevated relative to large caps for the second half of 2024 and into 2025.
Valuations for U.S. small-cap equities are near all-time lows on a relative basis versus large-cap equities. While valuations are historically not a great indicator of near-term performance, the valuation gap demonstrates upside potential should small caps rally.
While the opportunity for small-cap outperformance is present, a shift away from large-cap leadership will require a catalyst. This could be investor sentiment or election policy, but the most likely catalyst would be interest-rate cuts. Given the combination of small caps greater sensitivity to short-term rates and low relative valuations, investment return potential is attractive.
U.S. small-cap and large-cap relative P/E ratio
1/31/98–4/30/24
Source: FactSet, May 2024. Small-cap stocks are represented by the Russell 2000 Index, which tracks the performance of 2000 publicly traded small-cap companies in the United States. Large-cap stocks are represented by the S&P 500 Index, which tracks the performance of 500 of the largest companies in the United States. It is not possible to invest directly in an index. Trailing price to earnings (P/E) is a valuation measure comparing the ratio of a stock’s price with its earnings per share over the past 12 months. Past performance does not guarantee future results.
Asset class returns
Asset class returns comprise the Multi-Asset Solutions Team’s expectations of how different asset classes may perform over a 5- and long-term (20-year-plus) time horizon.
Expected returns
Source: Multi-Asset Solutions Team, Manulife Investment Management, as of July 31, 2024. Not all asset classes with forecasts are represented in every portfolio managed by the Multi-Asset Solutions Team. Data shown in the tables reflects the most recent data available. Asset class forecasts comprise inputs driven by proprietary Manulife Investment Management research and are not meant as predictions for any particular index, mutual fund, or investment vehicle. To initiate the investment process, the investment team formulates 5-year and 20-year-plus risk/return expectations, developed through a variety of quantitative modeling techniques and complemented with qualitative and fundamental insight. Assumptions are then adjusted for a number of factors. REITs refer to real estate investment trusts. USD, CAD, and CNY refer to the U.S. dollar, the Canadian dollar, and the Chinese yuan, respectively. This chart contains forecasts reflecting potential future events and is only as current as of the date indicated. There is no assurance that such events will occur, and the actual asset class return may be significantly different from that shown here. This material should not be viewed as a recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. It is not possible to invest directly in an index. Past performance does not guarantee future results.
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Nathan W. Thooft, CFA
Chief Investment Officer, Senior Portfolio Manager, Multi-Asset Solutions Team
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Robert E. Sykes, CFA
Senior Portfolio Manager, Head of Asset Allocation, U.S., Multi-Asset Solutions Team
![](/content/dam/mim-ca/landing-page/biography/james-robertson-352x352.jpg)
James Robertson, CIM
Senior Portfolio Manager, Head of Asset Allocation–Canada, Global Head of Tactical Asset Allocation, Multi-Asset Solutions Team
![](/content/dam/global-master/people/biography-browne-luke-headshot.jpg)
Luke Browne
Senior Portfolio Manager, Head of Asset Allocation, Asia, Multi-Asset Solutions Team
![](/content/dam/global-master/people/biography-kelley-geoff-headshot.jpg)
Geoffrey Kelley, CFA
Senior Portfolio Manager, Global Head of Strategic Asset Allocation and Systematic Equity, Multi-Asset Solutions Team
![](/content/dam/mim-private-wealth/viewpoints/authors/Benjamin-Forssell-headshot.jpeg)
Benjamin W. Forssell, CFA
Client Portfolio Manager, Global Multi-Asset, Multi-Asset Solutions Team
![](/content/dam/mim-institutional/global/viewpoints/real-assets-with-eric-menzer/Menzer.jpg)
Eric Menzer, CFA, CAIA, AIF
Senior Portfolio Manager, Global Head of OCIO and Fiduciary Solutions, Multi-Asset Solutions Team
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