2024 Strategic Positioning Update

Executive summary:

The current macroeconomic backdrop mandates prudent portfolio management amid heightened uncertainties.

  • We continue to maintain a cautious risk stance, with active risk of the 2024 positions below long-term levels.
  • We increased our exposure to duration, which is now the largest contributor to active risk. We achieved this overweight using a mix of nominal and real bonds.
  • We are maintaining our overall growth asset exposure, but we are leaning toward equities over credit.
  • We remain neutral on equity regions and currencies.

How might investors consider positioning their portfolios amid today's complex and uncertain economic landscape?

Our 2024 strategic positioning update explains how we're positioning our portfolios as 2024 hits its stride. This work is based on an analysis of market conditions over a cyclical horizon (3-5 years) discussed by our macroeconomist team, translation of these insights into asset class return forecasts by our forecasting team, and positioning done by our asset allocation team. Let's dig in.

Current market environment summary

  • Recession risk remains elevated: Tight monetary policy and emerging signs of a softening labor market increase the risk assessment of a policy misstep, which may cause a recession. So far, strong earnings growth and stable GDP (gross domestic product) are driving equity and credit markets. Our view is that the markets are priced for an optimistic scenario where recession risks don't materialize.
  • Inflation is cooling but remains above the U.S. Federal Reserve's (Fed) target: We are seeing a decline in inflation, with levels moving closer to central bank targets. While most economists expect this downtrend to continue, a recent uptick in inflation has investors questioning the time it will take to reach the Fed's target.
  • Unemployment remains low and resilient: Labor market metrics, like job openings and the pace at which unemployed individuals find employment, are as good as pre-pandemic levels. High nominal wage growth is still an inflation watchpoint, as it will push prices higher.
  • We expect the Fed to slowly pull down the funds rate. As inflation stabilizes, the Federal Reserve is expected to lower interest rates in 2024. As of this writing, three cuts are priced in. However, with strong growth, favorable labor markets, and inflation above target, the Fed is in wait-and-see mode.