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St. James’s Place updates asset allocations amid ‘soft landing’ base case

The wealth manager's confidence in global high yield and global EM equities has lowered.

St. James’s Place has updated its asset allocation views to create heavier weightings in global developed equities (ex-US) as it updates its base case to a soft landing, writes Hannah Williford.

Global developed equities (ex-US) were increased from a neutral rating to positive, balanced out with global EM equities, which was taken from an extremely positive rating down to a positive rating.

Justin Onuekwusi, chief investment officer at St. James’s Place, said: “Although EM equities have the highest mean expected return over a medium-term horizon, the range of outcomes is wide and exposure to idiosyncratic risks relatively high. Given all major developed equity markets offer a significant valuation discount to the US, it is prudent from a diversification perspective to spread our active risk.”

Global equities were moved from a negative rating to ‘0’, while global high yield was reduced to a ‘0’ rating.

“Following a contraction in global high yield credit spreads, we propose closing the overweight position in this asset class, which is funded by a modest underweight to global equities,” Onuekwusi (pictured) said.

“Although the yield-to-worst of the high yield market relative to equities appears attractive, this is driven by rising sovereign bond yields. The reward for assuming lower quality credit risk at this junction does appear slight.”

The past quarter caused SJP to move its base case scenario from ‘muddling through’, which would include 1.5% to 2% inflation and rates near 4% to a soft landing, with inflation between 2% to 3% and mild rate cuts. Onuekwusi said the economy still sits in late cycle as a technical recession seems near in Europe and did hit the UK.

“Investing late cycle is always difficult. Historically, risky assets perform well in this period, however, volatility can increase as markets assess the likelihood of a recession.  We have a neutral view on equity risk but have a bias away from richly-valued US assets,” Onuekwusi said.

As predicted interest rate cuts in the US have been reduced from six-to-seven down to three, there is still debate as to when these cuts will begin. Onuekwusi added that the US elections, held in November, could also influence the timeline to move up.

“A key tail risk we see as problematic is the gap between the US deficit and unemployment rate, risking heightened US bond market volatility, which could spill over into the gilt market. It’s worth noting, albeit cautiously, volatility on average tends to be higher in US election years,” he said.

This story first appeared in our sister publication, Portfolio Adviser.

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