Here’s How We Rebalanced Our Portfolios

In our latest market update we’ll go into detail on our latest portfolio rebalancing. As we approach the halfway point for 2023, the performance of markets and portfolios remains positive, in line with the first six months of the year.

The state of the global economy continues to lend itself to uncertainty, with signals that seem to indicate a slowdown and others that demonstrate the resilience of the financial system. At the same time, underlying risks have certainly diminished, with banking system fragilities becoming less alarming and the resolution of the US debt ceiling crisis.

Inflation continues to normalise in both mainland Europe and the United States, although it remains problematic in the UK and some key sectors. In the last month, the ECB, and the Fed have implemented a new cycle of rate hikes, but are shifting attention from the issue of inflation to that of growth, in line with investors’ expectations.The BoE also followed suit but its main policy task for the rest of the year will be to tackle stubborn inflationary pressures, with at least one more rate hike expected before the end of the year.

In this context, markets continue to show a positive trend, even if stock performance, in the US especially, was driven by a limited number of stocks, above all those linked to artificial intelligence, more cyclical markets have begun to price in a more conservative economic outlook.

All in all, the underlying momentum appears to be in step with the normalisation we were hoping to see this year, but being cautious, we should keep our guard up as the economy slows down. On the one hand, the effect of the rate hikes is beginning to make itself felt in the US and Eurozone, albeit not totally, with the slowdown which has begun to affect the manufacturing sectors in developed countries. Germany, for example, has entered a small recession due to the slower economic performance of China, one of its most important trading partners. On the other hand, credit crunch expectations are close to historical highs and the impact on growth and the level of strain on the financial system need to be assessed.

These are risks that cannot be ignored, in an environment that continues to offer numerous opportunities. The question we ask ourselves as fund managers is how to best equip ourselves in this very fluid situation without giving up on looking for returns?

Yields on short-term maturities and bonds with higher credit ratings remain very attractive, while premiums for increasing risk are less rewarding than a few months ago. This situation allows us to slightly adjust the composition of the portfolio, reducing the overall exposure to risk and duration without significantly sacrificing potential returns. This was exactly the same logic of our last rebalancing. It was a tactical move, aimed above all at seizing the opportunities we see in the bond market with a 6 to 8 month time horizon.

For example, an investor using Sterling can now buy corporate bonds with maturities of 0 to 3 years which offer a very similar rate of return to those of emerging market bonds, which have a longer maturity and a higher credit risk.

As a result, we decided to include securities with shorter maturities, which are then less exposed to interest rates and to a potential recession, while still maintaining a similar yield profile.

Looking at equities, we opted for a margin change that brings portfolios back in line with global benchmarks. We believe valuations will continue to be an important driver of returns over the medium term. Because of this, we’ve chosen to allocate part of our equity exposure to developed countries other than the USA which, after the recent rise in US stocks, offer more attractive valuations and have, for example, lower price/earnings ratios and higher dividends.

In short, the keyword of this rebalancing is “quality”, in a situation where we also remain fairly conservative, but without renouncing excellent yields and expected long-term returns. As always, if you have any concerns or questions about the latest rebalancing or the performance of your investment, please do not hesitate to contact your advisor.