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Marketscape | 02.13.24

Global Portfolio Update: Equity Markets Appear Near Fair Value

A resilient U.S. economy and strong earnings outlook have supported high stock valuations, while more modest valuations in Europe and emerging markets reflect uneven trends.

We expect a soft landing in the U.S. and uneven growth in developed economies, and we believe valuations of most equity markets reflect this thinking. Therefore, in our global tactical asset allocation portfolios, we hold a largely neutral position relative to our strategic benchmark allocations. Let’s take a closer look.

U.S. economic growth continues to surprise on the upside, so much so that we have questioned whether our “goldilocks” scenario of faster growth with low inflation could replace our soft landing scenario of slowing growth.  However, a deeper dive into growth and inflation dynamics convinced us to maintain our outlook for deceleration in U.S. growth with inflation falling towards Fed’s target of 2%. Forward looking drivers of labor demand and supply suggest this slowdown is likely to come. Outside the U.S., growth in markets is much more uneven. We see higher growth in absolute terms in China and improvement in nominal growth in Japan. But weakness in the U.K and eurozone is likely to continue.

The earnings outlooks for U.S. and emerging markets appear strong, with modest expectations for other developed markets. However, market valuationsreflect this, where U.S. valuations are on the upper end of their long term history.  Most other regions show valuations close to long-term medians. Given our outlook, we maintain close-to-benchmark allocations for most regions except developed international equities where we hold a slight underweight position. We expect the Fed to cut rates this year but perhaps not as much as the Treasury market is pricing in. In fixed income, we maintain close to neutral allocations for most sectors except high yield bonds, which we favor over Treasury inflation protection bonds . We are worried about a potential risk scenario where continued conflict in the Middle East raises oil prices and makes it harder for the Fed to act this year.  Elections later in the year are another potential source of market volatility.

Overall, we hold a slightly underweight position to risk with a modest underweight to global  equities and inflation protection bonds. We prefer high yield bonds where attractive yields help cushion potential losses if riskier segments of the market underperform.

Meet Your Expert

Anwiti Bahuguna, Ph.D.

Portfolio Manager

Anwiti Bahuguna, Ph.D., is chief investment officer of global asset allocation for Northern Trust Asset Management. She is responsible for managing investment performance, process and philosophy for multi-asset strategies globally. Anwiti leads NTAM’s strategic asset allocation, tactical asset allocation and capital market assumptions, and oversees the portfolio construction group and multi-manager business.

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