February 22, 2024
Asset allocation views: a variable growth outlook
Global growth remains variable across geographic regions, but opportunities in equities and fixed income remain as global central bank easing takes hold
Monetary policy is easing, but how far and fast it goes is the question
- The U.S. Federal Reserve (Fed) has definitively shifted from its sole focus on inflation to also supporting full employment. As such, with jobs and economic growth cooling, we expect a faster pace of easing than what the Fed has telegraphed. We see a Fed funds rate of 4.25% at the end of 2024 and 3.00% at the close of 2025.
- This clearer policy path could result in a more synchronous global easing cycle as a weaker U.S. dollar prompts rate cuts from central banks—particularly in emerging markets—that have been somewhat constrained from easing by recent U.S. dollar strength.
- That said, specific factors are still at play for many policymakers. The European Central Bank and Bank of England are contending with stubborn inflation, while the Bank of Canada faces sluggish domestic demand and the possibility of weak inflation. The Bank of Japan has actually raised rates twice this year, and Brazil Central Bank has increased rates due to inflation. Among other emerging markets, Bank Indonesia has begun cutting rates as the Rupiah stabilizes against the U.S. dollar.
United States: regardless of the landing, we’re likely to experience turbulence on the way down
- For months, there has been a debate about whether the U.S. economy would experience a hard landing, a soft landing, or no landing at all. We’ve maintained that no slowdown is highly unlikely given the massive monetary policy tightening of the past two years. Recent U.S. data has broadly shown deceleration, taking the "no landing" concept off the table.
- Outside of household consumption, most sectors of the U.S. economy have slowed, including housing, business investment, and international trade. We also see limited upside potential for consumption: With labour demand slowing, we expect a moderate hit to income and consumer confidence, which would ultimately weigh on households’ ability to spend.
- The question now is whether the U.S. slowdown will be limited to a modest deceleration or a more pronounced deterioration. So far, the data has moderated at a reasonable pace. If a more benign business environment unfolds, easier monetary policy should ultimately be a positive for risk assets. There is, however, an important caveat: We DO expect volatility around disappointing macroeconomic data as markets adjust to the odds of a weak growth environment.
Global economies have already softened; the global trade cycle will become an important theme
- While the discussion around whether or not the United States can stick the landing is alive and well, we would note that large parts of Europe, the United Kingdom, Japan, Canada, and China have all experienced underwhelming, and comparatively weaker, growth at various points over the last six quarters.
- With the United States slowing, we expect global trade volumes will continue to slow–an outcome already reflected in business surveys such as global PMIs. This is especially the case given the limited scope from China for improved domestic demand compounding any global slowdown. Consequently, any country-level assessment should include careful consideration of its exposure to the global trade impulse.
- Given the divergence in policy and macroeconomic data across economies, it's essential to maintain vigilance and carefully review portfolio positioning on a regular basis.
Source: Manulife Investment Management, October 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
At a time when we’re seeing peak-level U.S. equity valuations, tight credit spreads, continued uncertainty in the geopolitical environment, and wider dispersion in markets, there is value in taking a more cautious approach. That said, we believe opportunities still exist across both equities and fixed income.
Within the United States, there is an opportunity for healthcare and financials, and we still feel the large-cap growth story has some legs. Japan is enjoying improving fundamentals and reasonable valuations, and it stands to benefit from positive corporate governance reforms. Outside of Japan, Asia-Pacific is well-positioned as a defensive play within a slower growth, manufacturing-led world.
In fixed income, we continue to shift our preference toward high-quality investment-grade credit, and we see the appeal of floating-rate fixed income over high-yield bonds. Lastly, while we’ve cooled somewhat on broader commodities, exposure to gold remains appealing due to geopolitical uncertainty and favourable supply-demand dynamics.
Credit spread tightness
Asset class returns
Asset class returns comprise the Multi-Asset Solutions Team’s expectations of how different asset classes may perform over a 5-year 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.
Nathan W. Thooft, CFA
Chief Investment Officer, Senior Portfolio Manager, Multi-Asset Solutions Team
Robert E. Sykes, CFA
Senior Portfolio Manager, Head of Asset Allocation, U.S., Multi-Asset Solutions Team
James Robertson, CIM
Senior Portfolio Manager, Head of Asset Allocation–Canada, Global Head of Tactical Asset Allocation, Multi-Asset Solutions Team
Luke Browne
Senior Portfolio Manager, Head of Asset Allocation, Asia, Multi-Asset Solutions Team
Geoffrey Kelley, CFA
Senior Portfolio Manager, Global Head of Strategic Asset Allocation and Systematic Equity, Multi-Asset Solutions Team
Benjamin W. Forssell, CFA
Client Portfolio Manager, Global Multi-Asset, Multi-Asset Solutions Team
Eric Menzer, CFA, CAIA, AIF
Senior Portfolio Manager, Global Head of OCIO and Fiduciary Solutions, Multi-Asset Solutions Team
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