January 30, 2024
Asset allocation views: proceed with caution
There were a number of key economic and market themes in flux in 2023, most notably a global economic environment that held up stronger than most market participants predicted. As 2024 gets under way, we look at some of the themes driving our asset allocation outlook.
Key global themes
The global growth picture remains uncertain despite displays of resilience in parts of the world. We’ve identified three key themes that could influence the way we think about asset allocation in the coming months.
A widening of investment opportunities
- 2023 saw exceptional strength from a small basket of U.S. large-cap technology stocks as earnings soared amid optimism surrounding artificial intelligence among other factors.
- In 2024, the expanding breadth of U.S. corporate earnings strength could benefit undervalued areas of the market, including small-cap and high dividend stocks, as well as traditional value sectors such as financials.
- Globally, desynchronization in economic growth could present an opportunity as economies tied to manufacturing (in Europe) may be exiting a recession as economies tied to services (the United States) may be entering a period of slower economic growth. Within emerging markets, nimbleness will be key in navigating an ever-changing investment landscape.
U.S. markets: the cleanest shirt in a dirty wardrobe
- We may be forecasting a U.S. recession; however, active asset allocation processes aren’t based on absolutes. Rather, they’re based on the concept of relative values and opportunities. In that sense, the U.S. markets continue to offer the best opportunity for investors as global growth slows. The U.S. economy continues to benefit from a resilient consumer, a strong labor market, and slowing inflation.
- 2024 could be challenging for Europe as the region confronts weakness in both its services and manufacturing sectors. Growth in developed economies such as Canada and Australia may be capped because they tend to be more sensitive to elevated interest rates. Emerging-market economies could also struggle under the weight of higher oil prices, slower Chinese growth, and a strong U.S. dollar. That said, the current negative sentiment toward Mainland China may be overdone, creating some near-term tactical opportunities.
Higher for longer: potential implications for asset allocators
- Historically, companies with positive fundamentals—those with high return-on-equity ratios, low leverage, and consistent posted earnings growth—have outperformed their peers going into and during recessions. Conversely, companies in weaker financial positions have faced challenges from elevated refinancing costs when financial conditions tightened.
- Within fixed income, we see less value in high-yield credit and believe that recession risks have been underpriced in that segment of the market. In our view, investors aren’t adequately compensated for the shift down in quality, particularly in light of the yields that are on offer in the investment-grade space.
- Active management could help investors take advantage of the highest-quality investments across equity, fixed-income, and private markets.
Source: Manulife Investment Management, February 2024. These views are updated on a quarterly basis. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. No forecasts are guaranteed.
Active asset allocation views
Asset class focus
Private credit: a favorable and growing alternative asset class
Private credit involves lenders offering customized debt solutions to borrowers who are often midsized, well-established borrowers. This debt covers a variety of purposes and sits at different levels of the capital structure, with loans typically held until maturity.
One of the key drivers of interest in private credit is the premium yields offered relative to comparable quality public debt. Private credit as an asset class has historically provided a sizable yield advantage over public market equivalents, compensating investors for taking on illiquidity risk.
The private market nature of the asset class limits price volatility as the loans aren’t marked to market daily. Additionally, these private market loans have historically seen lower default rates and higher recovery rates compared with public high-yield bonds.
There has been significant market growth for private credit since the global financial crisis with strong growth expected to continue. Tight credit conditions, which have been amplified by regional bank failures, have left a funding void for smaller and midsized companies that private debt will continue to fill moving forward.
Asset class returns
Asset class returns comprise the multi-asset solutions team’s expectations of how different asset classes may perform over a 5-year and 20-year-plus time horizon.
Source: Multi-Asset Solutions Team, Manulife Investment Management, as of January 31, 2024. Not all asset classes with forecasts are represented in every portfolio managed by the Multi-Asset Solutions Team. Data shown in the tables reflects the most recent data available. Asset class forecasts comprise inputs driven by proprietary Manulife Investment Management research and are not meant as predictions for any particular index, mutual fund, or investment vehicle. To initiate the investment process, the investment team formulates 5-year and 20-year plus risk/return expectations, developed through a variety of quantitative modeling techniques and complemented with qualitative and fundamental insight. Assumptions are then adjusted for a number of factors. This chart contains forecasts reflecting potential future events and is only as current as of the date indicated. There is no assurance that such events will occur, and the actual asset class return may be significantly different than that shown here. This material should not be viewed as a recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. It is not possible to invest directly into an index. Past performance does not guarantee future results.
Multi-Asset Solutions Team
Nathan W. Thooft, CFA
Chief Investment Officer, Senior Portfolio Manager, Multi-Asset Solutions Team
Robert E. Sykes, CFA
Senior Portfolio Manager and Head of Asset Allocation, U.S., Multi-Asset Solutions Team
James Robertson, CIM
Senior Portfolio Manager, Head of Asset Allocation–Canada, and Global Head of Tactical Asset Allocation, Multi-Asset Solutions Team
Senior Portfolio Manager and Head of Asset Allocation, Asia, Multi-Asset Solutions Team
Geoffrey Kelley, CFA
Senior Portfolio Manager, Global Head of Strategic Asset Allocation and Systematic Equity, Multi-Asset Solutions Team
Global Chief Economist and Strategist, Multi-Asset Solutions Team
Eric Menzer, CFA, CAIA, AIF
Senior Portfolio Manager and Global Head of OCIO and Fiduciary Solutions, Multi-Asset Solutions Team
Benjamin W. Forssell, CFA
Client Portfolio Manager, Global Multi-Asset Team, Multi-Asset Solutions Team
January 30, 2024
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