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Rebalancing portfolios to take advantage of market opportunities – market update

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Discover Moneyfarm’s investment strategy for 2023. On February 28th at 6pm, we’ll share our strategic view for 2023. Register here.

This month we’re rebalancing the portfolios to take full advantage of market opportunities, repositioning them towards a more risk-oriented position. We’re making these changes after considering the results from the 2023 Strategic Asset Allocation assessment, which highlight extremely positive long-term expected returns. There will be an event to talk you through this on the 28th of February.

For equities, our long-term capital calculation predicted an average of 8% return per year for the next 10 years, improving remarkably from the 10 year expected returns predicted in 2019, 2021 and 2022. What’s more, for fixed income, the expected returns are the highest we’re seen since we started running the calculations back in 2014.

Inflation data flow has been positive overall in the last two months for both the UK and the US and therefore markets are feeling less pressure from central banks.

This week we saw US inflation data revealed that inflation continued to cool in January, rising at a rate of 6.4%, the lowest rate since October 2021. UK CPI data was also released and data showed it slowed to a four-month low of 10.1% in January down from 10.5% in December. UK inflation has been cooling since the highs of 11.1% in October 2022, mainly thanks to lower energy price growth, the easing of global supply chain bottlenecks, and a cooling of aggregate demand due to the slowing economy.

The short- to medium-term outlook looks less daunting than it did a few weeks ago. Indeed, the results of the recent earnings season and the general macroeconomic outlook suggest that the economy is set to perform better than expected. This makes the soft landing narrative more appealing. Furthermore, the reassuring data on inflation and the attrition of extremely aggressive monetary policies contributed to an improving economic situation.

Geopolitics still has a role to play on performance, but we see the maintenance of the status quo as the most likely scenario. There will be some disruptions in the energy markets but these are already priced in. As a result we believe that, even in a scenario of escalation of the Russia/Ukraine situation, asset prices will be less affected than in the last year.

Geographically, we continue to maintain our bias towards the United States (US) and emerging markets, compared to Europe. This is because we expect the US and emerging market economies to be more resilient to global challenges.

We had long debates about what to do about equities. Developed market economies are holding up fairly well, and that’s probably helped risky assets over the past couple of months. But we remain concerned that we’ll see more of a slowdown going forward as the impact of higher interest rates really kicks in. 

In the end, we concluded that we would like to remain conservatively positioned (relative to our internal benchmarks) but less so than we were last year. We remain generally underweight risky assets (equities, high yield bonds and EM debt). We decided that adding to credit – High Yield and EM debt – was the best way to express that view, and we kept our equity exposure slightly underweight in most cases (some portfolios bought, some sold – depending on their starting positions). 

Within equities, we resisted the urge to chase European equities after their strong performance at the end of last year, and have kept a slight tilt towards Emerging Markets and the US. We will continue to revisit these views in light of new information

We increased our exposure to emerging market government bonds for two reasons:

  1.   In the short term there is a very strong interest component and default risks are limited and under control.
  2.   Long term expected returns are at their highest levels compared to recent years for this asset class

In the coming weeks, we will continue to monitor the situation closely and will make further changes if needed.

If you have any questions about the rebalancing and what it means for your portfolio, don’t hesitate to get in touch with our advisory team.

Secure your spot at our annual event
Discover Moneyfarm’s investment strategy for 2023. On February 28th at 6pm, we’ll share our strategic view for 2023. Register here.



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