24.01 Liontrust Views Winter 2024 - Flipbook - Page 5
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Market backdrop
Global financial markets rallied in the last three months
of 2023 after poor performance in the previous quarter.
This was driven by a switch in expectations to the fact
that interest rates in leading economies would be cut
early in 2024. This was despite central banks continuing
to warn that the fight against inflation was not yet over.
The quarter had begun on a negative note in October,
however, when there were concerns that interest rates
would remain higher for longer to tackle stubborn
inflation. Conflict also flared in the Middle East. The
US S&P 500 index officially corrected in October,
breaching a level more than 10% below its high earlier
in the year. The enthusiasm for AI (artificial intelligence)
that drove the market earlier in the year dissipated.
Despite hitting a 33-year high, the Japan market was
still below its all-time high level from December 1989
and we believe it has some way to go upwards as its
economy enters a new phase after meagre performance
against a deflationary backdrop for two decades. We
believe that Japan continues to offer a combination of
relatively attractive valuations with a positive outlook for
economic growth. Current conditions may impact the
region because of its reliance on exports (although yen
weakness may be positive here) and, as with Europe,
softening global growth could be problematic. But, on
balance, we feel Japan is worthy of an overweight.
We also raised our rating for Japanese smaller
companies from neutral to positive for the same reasons
that we did so for the large and mid caps. Smaller
companies in Japan should benefit from the same broad
themes, with additional sensitivity to domestic economic
conditions, whether positive or less so.
Then markets changed in November. Data showed
inflation was cooling significantly in the US, Europe and
UK. Global equities saw their biggest monthly rally in three
In our tactical review, we also maintained our positive
years and yields (the return investors expect to receive each
outlook on Asia Pacific ex-Japan and emerging markets.
year to maturity) compressed in fixed income markets.
Although negative sentiment around China continues
Rate cuts in the New Year looked more likely in the UK
when data showed the economy shrank
in the third quarter and fears grew that
Europe was entering a recession. The US
In our latest quarterly Tactical Asset
economy remained buoyant.
Allocation review, we raised our outlook
for Japanese equities, including to smaller
companies, from neutral to positive
What we are doing
The adjustments we made to the target
asset allocations for our funds and
portfolios in the last quarter of 2023
were all in equities, whereas they were
mainly in fixed income in the previous quarter.
Although the overall target exposures to equities within
each of our eight risk levels remained unchanged, we
trimmed those for US and European equities to fund a
more pro-Japanese stance. Overall exposures to fixed
income, cash and alternatives were all unchanged.
In our latest quarterly Tactical Asset Allocation review,
we raised our outlook for Japanese equities, including
to smaller companies, from neutral to positive. Japanese
equities benefited in 2023 from relatively cheap
valuations, a weakening currency, robust economic
growth and loose monetary policy.
to weigh on both, we believe Asia offers a relatively
strong economic growth outlook, benign inflationary
pressures and potential for policy easing. We believe
that emerging markets also offer positive long-term
growth prospects.
Regarding fixed income, we maintained our broadly
neutral outlook, although we are positive on investment
grade corporate bonds. Changes to our Strategic Asset
Allocation earlier this year also incorporated greater
target exposure to global high yield bonds, which was
generally a positive for our solutions in 2023.
LIONTRUST VIEWS – WINTER
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