The European private bank isn't in a particularly risk-taking frame of mind at the moment. Its chief investment officer sets out its thinking.

After a difficult period for certain markets, there’s plenty of reasons to take stock. Interest rates may have peaked as central banks try to work out if the monetary medicine has curbed inflation sufficiently. In talking to wealth managers, the next few months will be a period when the data is closely scrutinised to know conclusively. And of course, within the UK, there’s an election in the offing - likely at some point during 2024. 

To reflect on asset allocation, investment risks and choices is Daniele Antonucci, chief investment officer, Quintet Private Bank. The editors are pleased to share this content; the usual editorial disclaimers apply. Jump into the conversation! Email tom.burroughes@wealthbriefing.com

With a momentous summer behind us, we have debated the key macro and market crosscurrents and their investment implications. With volatility looking set to continue, we have decided to stay defensive in portfolios. However, along with a range of risks, this volatility also presents opportunities. Therefore, we’ve recently implemented three actions to mitigate the former and seize the latter.

The first action is in response to the likelihood of a eurozone and UK recession, which makes government bonds more attractive. Why? Because of the chain reaction a recession can have on bond yields. As growth slows and economies enter recession, central banks can provide stimulus by cutting interest rates. As interest rates fall, so do government bond yields. However, inflation is critical here because, as we know, spiralling inflation does not come with low interest rates.

The good news is that eurozone inflation has decisively moved past the peak, and UK inflation is also trending down, though not as much as in the eurozone and the US. This fall in inflation means we’re close to the peak in interest rates. Therefore, we believe now is an opportune moment capture the yield of eurozone and UK government bonds before central banks cut rates in 2024 to stimulate economic growth.

The second action is in response to the underwhelming rebound of China, impacting our Asia-Pacific equities position, which includes Japan. The pick-up we expected from China this year hasn’t happened. This disappointment is partly due to the worldwide slowdown in demand for goods, which has affected China’s exports. But there have been issues on Chinese soil, too. Policy stimulus has been lacklustre. Retail sales, industrial production, and business investment have all slowed. Add to this a property crisis and the outlook for China doesn’t look great.

So we think it’s unlikely we’ll see a swift turnaround in the fortunes of Chinese and broader Asia-Pacific equities. One bright spot in the region has been Japan. But the rally has been driven by the lower-quality part of the market, valuations are no longer cheap, and we think the reform and rebound story is well understood by investors. Therefore, we closed our position in Asia-Pacific equities and reoriented it towards developed market equities. 

The third action is that we’ve lowered the probability of a US recession in our forecasts, which nevertheless remains a likely outcome. If a recession does hit the US, the economic resilience we’ve seen so far suggests it’s likely to be mild. This matters because it implies that dividend cuts are less likely than we previously thought. This is why we decided to shift our US dividend equity exposure back towards the broader US market. 

In general, our tactical 12-month view remains cautious. We’ve invested in high-quality bonds - especially US Treasuries - over riskier equity markets and high-yield bonds. We expect central bank rates in developed markets to be close to or at the peak, but we don’t see rate cuts in the near term. And we still think that investors are too optimistic about economic and earnings growth.

We also stay defensive within equities. We’ve invested in low-volatility equities in the US and Europe. Relative to our long-term allocation, we’re positioned with a lesser weight to US equities (slightly) and eurozone equities (somewhat more markedly). Furthermore, our single-line portfolio holdings remain biased towards investments which we believe demonstrate solid long-term growth prospects, strong balance sheets and attractive valuations. These attributes can serve as a buffer in the event of a reversal in market sentiment.