Quarterly Global Asset Allocation Portfolio Outlook | Q3 2024

The Big Picture – Global Asset Allocation outlook
Key takeaways

Politics may bring volatility, and the global economy remains fragile, with stronger growth in some areas balanced by US weakening.


By mid-2025, we believe major Western central banks will have cut rates by 100-150 basis points from peak levels


We adopt a barbell adjustment to allocations, with reductions in credit categories and boost government bonds and real estate. 

Asset Allocation Amid Global Volatility

Amidst global political shifts and a delicate economic landscape, how does the future of financial markets look? We believe politics may bring volatility and the global economy remains fragile, with stronger growth in some areas balanced by weakening in the US.

However, more than 25 central banks cut rates in 2024 (excluding the US Federal Reserve - Fed), raising hopes about recovery. As a result, a lot of that is priced into assets. We reduce investment grade (Overweight) and high yield (to zero) within our Model Asset Allocation, while boosting government bonds and real estate (both Overweight). Regionally, we prefer European and emerging market (EM) assets.

Questions persist about growth outlook, inflation stickiness, central bank easing timing, and market effects of election surprises. After seeking opportunities, we adopt a barbell adjustment, cutting credit and boosting government bonds (defensive) and real estate (riskier, lagging).

Most central banks will continue cutting rates; the Fed and Bank of England (BOE) may join. By mid-2025, major Western central banks may cut rates by 100-150 basis points (from peaks). Much is priced into long-end yield curves, limiting downside in 10-year yields. Yield curve steepening [i]may result from falling short rates; we favour duration assets more than three months ago, post-long yield rise. Election surprises may have limited durable impact, adding caution.

We expect dollar weakening (especially vs. yen) as Fed easing exceeds other central banks' (in our view). This could help gold, easing high levels (we find gold costly), also aiding commodities and EM assets.

Inflation trends across global economies

The question often asked is whether inflation is proving stickier than anticipated. The simple answer suggests yes; inflation's trajectory appears to have flattened or even reversed in some cases. However, the reality is nuanced. Much of the assessment of inflation centers on US headline Consumer Price Index (CPI) data, which bottomed at 3.1% year-on-year in June 2023 and has since ranged between 3.1% and 3.7%. In contrast, Eurozone headline inflation seems to be declining again after a brief pause, and UK inflation has clearly trended downwards. Meanwhile, Japan continues to experience downward inflationary pressure, while China's inflation remains around zero.

Figure 1: Proximate drivers of global inflation are mixed

Note: Past performance is no guarantee of future results. Monthly data from December 2005 to May 2024 (as of 31 May 2024). NY Fed Global Supply Chain Pressure Index tracks the state of global supply chains using data from the transportation and manufacturing sectors, as constructed by the Federal Reserve Bank of New York. It is shown as standard deviations from the historical mean.

Source: Federal Reserve Bank of New York, Global Supply Chain Pressure Index, S&P GSCI, LSEG Datastream and Invesco Global Market Strategy Office

Figure 1 displays why the decline in headline inflation has slowed: commodity prices are rising moderately compared to previous years, potentially mitigating supply chain disruptions (despite concerns like those in the Red Sea). Additionally, core inflation in the US, measured by both CPI and Personal Consumption Expenditures (PCE), has continued to decrease, and the deceleration in wage growth indicates this trend may persist. However, wage growth trajectories vary across regions; the Eurozone has not yet reached a clear peak, while Japan anticipates a positive increase based on recent wage settlements. Overall, our assessment is that inflation is still on a downward trajectory.

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Asset allocation is the process of dividing an investment portfolio among different asset classes, such as stocks, bonds and cash and so on. Bonds generally tend to be ‘safer’ investments than stocks and are, for example, seen as more defensive. Assets are allocated based on economic and monetary expectations. 

Spreading the risk and number of potential opportunities across various asset classes, such as equities, fixed income and commodities. The aim of diversification is to reduce the overall risk of the portfolio.

Central banks can ‘tighten’ policy by raising interest rates. This is done to curb inflation or an overheating economy. After the pandemic, inflation rose as pent-up demand was released and supply chains issues were cleared. Russia’s invasion of Ukraine further spurred inflation due to higher energy costs. Central banks responded with a series of rate hikes, which is the tool generally used to moderate inflation. 

When an asset is assigned Overweight, an analyst or investor typically thinks that it will outperform others in the market, sector, or model. Underweight is indicative of the opposite. 

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

Important information

  • Data as at 31st May 2024, unless otherwise stated.

    This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication.

    Views and opinions are based on current market conditions and are subject to change.

    EMEA 3656593/ 2024