April rebalance: Changes to our portfolios

We’ve made some changes to our UK model portfolios and wanted to discuss that in a bit more detail. 

You’ll see that in most cases, we’ve added to European equities and diversified our bond exposure by selling some longer-dated US government bonds in favour of longer-dated UK government bonds.

There are a few points to make. First, we think our starting position in most of our model portfolios has been fairly conservative and that we’ve had scope to add to risky assets. Second, we think that the global macroeconomic environment could improve over the coming quarters and European equities should benefit. Third, we think that the relative valuation of European equities compared to the US argues in favour of adding to Europe rather than the US. 

Part of our conservative stance was based on the concern that we could see a much weaker macroeconomic environment in the face of higher rates. Broadly speaking, the macro data has come in better than some of the more bearish scenarios. Much is made of the strength of the US economy, but even in Europe and the UK – where growth has been anaemic – we haven’t seen a deep recession either in the economic data or, importantly, in terms of corporate profits. 

At the same time, we’ve seen inflation come down – not as far as we might have hoped, but moving towards the 2% target of most Developed market central banks. While the Federal Reserve in the US might delay its loosening cycle, we think that the ECB may move sooner. That raises the prospect of a growth recovery in 2025 that should provide a tailwind for equities.

As always, we spent much of our discussion thinking about how we could be wrong. There are always good reasons for caution. We’ve noticed that we sound much smarter to ourselves when we discuss the risks of an investment, rather than the opportunity – even if the historical experience for equities is that optimism has generally been the right approach.

We were particularly focused on the assumption of a macroeconomic recovery. Stubborn inflation means that interest rates may stay higher for longer, and that could slow down economic activity still further. But with rates in Europe likely to come down over the coming quarters, the US economy still pretty resilient and some signs of recovery in China, we think that the outlook for global growth could improve.

Geopolitics represents another risk to a more optimistic outlook. Historically, you might say that financial markets have largely looked past geopolitical risks and that’s the view we’ve taken on this occasion. But we’re mindful that in the future geopolitical tensions could have a greater impact on investor risk appetite and on global supply chains.

We also discussed adding to Europe rather than, for instance, the US. One supporting argument is that Europe looks cheaper than the US on traditional valuation metrics. European valuation multiples also look cheaper versus their own history, especially after the recent pull-back in markets. The challenge to this narrative is a familiar one – European equities have traded at a valuation discount to the US for years, and that discount has steadily widened. Why would that change now? Our conclusion was that stronger global growth could allow cheaper assets to perform better. 

As always, we’ll continue to monitor our portfolios and the global environment and stand ready to make changes as our thinking evolves.

Richard Flax: Richard is the Chief Investment Officer at Moneyfarm. He joined the company in 2016. He is responsible for all aspects of portfolio management and portfolio construction. Prior to joining Moneyfarm, Richard worked in London as an equity analyst and portfolio manager at PIMCO and Goldman Sachs Asset Management, and as a fixed-income analyst at Fleming Asset Management. Richard began his career in finance in the mid-1990s in the global economics team at Morgan Stanley in New York. He has a BA from Cambridge University in History, an MA from Johns Hopkins University in International Relations and Economics, and an MBA from Columbia University Graduate School of Business. He is a CFA charterholder.