Whilst we still believe a recession is coming (see 'Yes, we could still see recessions - Investment Clock economic update'), we have been overweight equities in the multi asset funds we manage since Autumn 2022.
In fact, we started to add to equities from an underweight position in September (chart 1) as investor sentiment became overly depressed during the mini-budget market turmoil and our contrarian equity indicator suggested we take advantage of equities being cheap in the short run.
Chart 1: Equity conviction level since June 2022
We started adding to equities in September 2022 and have stayed overweight since.
Source: RLAM multi asset funds, as at 5 June 2023. +10 is maximum overweight position and -10 underweight position
Unexpectedly, we have continued to remain overweight equities despite our worries. This is primarily driven by the improvement of the underlying global growth picture (chart 2), with global consumers remaining resilient thanks to robust labour markets, excess savings and partial inflationary pressures easing with falling energy prices, all despite aggressive central bank rate hikes.
The improving macro picture has helped the earnings outlook recover, with a lag, and helped fuel the recovery in global equity markets. This rally is a classic example of equities steadily climbing the ‘wall of worry’ (UK mini budget turmoil, banking failures and US debt ceiling); investors are forced back into equities as evidence builds against an immediate recession and the pain of being defensive becomes too much.
Chart 2: Royal London global growth scorecard and earnings revision ratio
Our growth scorecard started to trough in September and the earnings picture eventually took notice.
Source: Refinitiv DataStream as at 22 June 2023
More recent equity performance has been driven by technology stocks and we believe that the hype around artificial intelligence (AI) has pushed investor sentiment to overly positive/bullish levels. Whilst this on its own is not a sell indicator, as equity markets can continue to rise for a prolonged period, it is making us question the sustainability of the recent rally. Against the backdrop of tighter monetary conditions and the risk of further interest rate rises causing a recession, this risk remains heightened.
We do still expect to move to a more defensive position at some point this year but we will be making use of our research-led investment process to help avoid behavioural traps, just as it helped us avoid staying underweight equities on recession views for too long.
Where we stand
Overweight global stocks, high yield and discretionary sector and Japanese shares
Underweight bonds, commodities, energy sector and emerging market shares
Weightings may vary according to tactical asset allocation and the Fund may invest outside of indicated asset classes as the manager sees fit. The views expressed are the author’s own and do not constitute investment advice.
Source: RLAM. Tactical positions as at 22 June 2023.
Hiroki Hashimoto is a Fund Manager within Royal London Asset Management’s Multi Asset team. The team manages portfolios including the Governed Range pension portfolios, the Global Multi Asset Portfolios (GMAPs), Multi Asset Strategies Fund (MAST) which is available on third party platforms and the euro-based multi asset funds that form the core of the Royal London Irish pensions offering.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.
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