Justin Onuekwusi, chief investment officer at wealth manager St James’s Place, shares his latest insights on global asset allocation and thoughts on recent market events.

Justin Onuekwusi (pictured) at UK-based St James’s Place said this week that he is neutral on global equities, but remains underweight in US equities, and continues to evaluate the potential risks posed by the market.

“We are currently relatively neutral on equities and positive on sterling. Equity valuations remain mixed across regions, with the global average skewed to look expensive by the US,” Onuekwusi said in a note.

“We remain underweight in US equities and continue to evaluate the potential risks posed by the market. This is not a result of the US political situation but rather a consequence of its reach. The growing size of many US-listed companies, namely the trillion-dollar technology companies, means today the US makes up some 70 per cent of the global equity market. We remain alert to the concentration risk this could present,” he continued. 

Although Onuekwusi remains constructive on emerging markets, he has moderated his overweight position this year. Given that non-US developed markets also offer compelling valuations, he believes it prudent to diversify his active positioning across markets with similar characteristics to the US market. This has been implemented across his portfolios this year, with increased allocations to the UK, Europe, and Japan.  

“We have moved our credit overweight to neutral, as credit spreads no longer offer a significant valuation opportunity. This has been implemented by a further reduction in high yield bonds across portfolios,” Onuekwusi added. 

Market events
The last quarter was eventful for capital markets, with equities experiencing a sharp decline in late July before clawing back losses and ending the period on a positive note. The positive headline numbers masked some notable turmoil during the quarter as fears of a US recession mounted, the unwinding of the yen carry trade and questions about tech valuations all led to a sizeable risk-off move. “However, the turbulence proved brief as stronger US data and fresh China stimulus led to significant recovery,” Onuekwusi said. See more commentary here and here on US tech volatility and on the impact of China’s latest stimulus measures aimed at reviving the slowing economy.

From a macro perspective, the continued decline in headline inflation saw a cut in interest rates from the European Central Bank, and the beginning of an easing cycle from the Bank of England and the US Federal Reserve. The latter's move was noteworthy, with a larger-than-expected 50 basis points reduction being warmly received by the markets. 

“The broader equity market valuation increased over the quarter, resulting in a significant style shift. Value outperformed growth, with sectors such as real estate, utilities, and industrials at the top of the leader board. Information technology and communication services were the weakest performers, along with energy,” Onuekwusi continued.

Credit markets saw a further tightening in spreads as investor sentiment was buoyed by monetary easing and continued signs of a soft landing. This saw both investment grade and high yield markets generate strong returns over the quarter. With investors pricing in more rapid rate cuts, it was a strong quarter for sovereign bonds. US Treasuries (+4.9 per cent) and euro sovereigns (+4.1 per cent) advanced (in local currency terms). September also saw US Treasuries advance for a fifth consecutive month.   

“The last quarter ended with a strong rally from emerging market equities as China unleashed a large and comprehensive stimulus package that cut rates, boosted the real estate sector, and supported the equity market. On the last day of the quarter, the Chinese index was up by +8.5 per cent, in local currency terms, marking its strongest daily performance in 16 years,” Onuekwusi said. “Overall, this meant financial markets defied the typical September weakness we’ve seen in recent years.”