All’s Well That Ends Well

Quarterly Asset Allocation Update

All’s Well That Ends Well

December 2023. by PM

Executive Summary

  • The prevailing theme of 2023 was ‘disinflation’ ultimately providing fertile ground for equity market returns
  • Recession concerns have been overplayed, and perhaps a corporate earnings recession was hiding in plain sight and now is in the rear view mirror
  • Predictable late year rallies support the ‘softish landing’ narrative, as liquidity improved and central banks dialled back hawkish rhetoric
  • Tracking Liquidity is fundamental to making asset allocation decisions – in the short to medium term, significant liquidity provision habitually trumps all other macro-factors.
  • AI continues to drive both productivity (helping company earnings) and the tech sector boom
  • Economic momentum, fuelled by the government largesse in an election year, continues to suggest rising markets in H1 2024.

  • Introduction

    Despite the jungle drums telegraphing recession at the beginning of the year, and some ensuing banking crises induced volatility, 2023 finished in fine fettle, as December capped off a healthy year in financial markets all told. As we had alluded too at the turn of 2023, when recession calls were so deafening, too many people were positioned accordingly and likely to be wrong footed. More recently, concerns to the contrary of ‘higher for longer’ interest rates have for now lost some of the wind in their sales.

    The prospects for 2024 are more finely balanced in our minds than perhaps is the consensus. Whilst sentiment becomes increasingly bullish, and price in a rather benign ‘middling environment’, in an unprecedented election year that sees 2bn people in 50 countries goes to the polls, the potential for a re-acceleration in global growth, and the headwinds that would be for further falls in inflation is perhaps underappreciated.

    Liquidty Trumps All

    Regardless of the noise going into the third quarter, we remained steadfast in following liquidity in the third year of an election cycle. Habitually bullish, any incumbent government in preceding 12 months before an election, would typically ensure the stimulus cheques continue to queue up orderly whilst voters are in receptive mood. The White House was no exception – whilst central banks globally have been running down their balances, (and withdrawing liquidity from the system), their counterparts in Treasury departments have been a firm counterpoint, running up deficit spends to keep the consumer in the post pandemic lifestyle they have become accustomed too.

    Our proprietary measure of global liquidity, which tracks the ‘abundance’ or lack thereof, of monies in the system available to both Wall Street and Main Street, certainly lost steam from mid April to mid-October, and stock markets ranged accordingly.

    However, thereafter it began a new uptrend as governments globally reduced the pace of bonds being issued (which has the consequence of draining liquidity from the system), and for those techno wonks, a persistent decline in the Fed’s standing liquidity facilities (RRP’s), provided the fuel to push markets higher into year end. Tracking liquidity in real time is a fundamental cornerstone of our approach as it often leads, and better explains stock market direction in the short term, than incoming data or earnings does.

    Figure 1: Market Regime Summary

    Quad Regime

    Global Regime: Goldilocks

    Global Macro Risk Matrix: GOLDILOCKS is the Top-Down Market Regime. GOLDILOCKS is a risk-on Goldilocks is a risk on regime in which investors are generally rewarded for increasing risk exposure.

    Key portfolio construction considerations in GOLDILOCKS:

    Risk Assets > Defensive Assets
    High Beta > Low Beta,
    Growth > Value,
    Mega Cap Growth > Dividend Compounders,
    Corporate Bonds > Treasurys
    High Yield > Investment Grade.

    Generally then, before we put a little more meat on the bones, our macro ‘weather model’ is currently generating a bullish three-month outlook for global equities, corporate bonds and even digital assets such as Bitcoin, whilst a neutral outlook for commodities and less favourable environment for the US Dollar to perform.

    Global Growth Resilience

    The latest data supports the notion of the enduring ‘resilience’ in the US economy in particular – a narrative which came into being during the summer of 2022. Ultimately, all goods things come to an end, but that’s not in the foreseeable. The reality is that even if unemployment began to track higher, in the main the consumer is very well supported. Since the pandemic, consumer balance sheets in the US have improved by some 47trillion US Dollars – 32 of that in savings/investments and the balance from house price inflation. That is an unprecedented savings cushion to run down, even if the cost of living increases are very material. Perhaps we’re in the minority when we contend that given the margin for error that consumer balance sheets have, many developed economies can stomach a world of 5% plus interest rates, but even if the consensus has a different perspective, we all must recognise that many consumers (and corporates) refinanced and pinned their mortgage rates at 3.5% for the long haul.

    So the economic momentum in consumer spend seems hear to stay, and most leading indicates currently and correctly by our lights, point to a low-to-middling probability of recession.


    A surprising surge in productivity growth has been a paen for corporate earnings, and helped in maintaining margins when it could have become more difficult to continue to pass on price increases. It’s unlikely to be sustainable over any period of time, but has certainly contributed to the plateau’ing of prices. Consistent with our Goldilocks read on the current regime, an ‘immaculate disinflation’ describes developed economies. In fact, some monetary policies have already turned the tide, whereby emerging nations such as Brazil, have already begun to cut interest rates.

    Our research has India and China as having the most favourable inflation dynamics abroad, whilst the UK and Australia still face stiffer tests.

    As we touched on elsewhere, we should not underestimate the commitment of governments to run very supportive fiscal policies, (that’s to say generous stimulus, benefits and infrastructure spending), to grease the wheels coming into an election year. Meanwhile, on the other side of the ledger, the Federal Reserve amongst others continues to lean bullish, allowing the market to believe that the top of interest rate cycle is in. Hardly a bearish backdrop for financial markets in the near term then.

    Figure 2: Summary Asset Allocation Views

    Asset Class Short-Term View Long Term View
    DM Equities SSharp reversal in sentiment to extreme bullish readings once more, with market overbought but momentum is undeniable. Developed markets outside of US continue to offer better value, and may have easier monetary policy support.
    EM Equities Breadth/participation in EM assets sharply improved, as weaker USD catalyst required duly arrived EM still to perhaps find a bottom, which would likely start a long period of outperformance relative to DM. Valuations reasonable but could become more so.
    Commodities Sentiment neutral, valuations resetting and outlook improving. Any growth slowdown partially offset by capex boom. China as marginal buyer remains key, and muted.
    Property Sentiment remains extremely depressed, yet bouncing from oversold. Monetary policy yet to definitely flip dovish which would support. Post pandemic, certain sectors remain depressed – possibly due to new paradigm. Leverage remains high, although valuations improving.
    Corp. Credit Risk on moves reflect very full valuations, tight spreads and sentiment complacency a concern. US economy mixed, and sovereigns providing better value. Little buffer against material slowdown.
    Govt Bonds Macro tensions persist – inflation vs softer growth, but investors continue to nibble at duration at these yields. A role to play as portfolio ballast, but perhaps limited until US consumer breaths his last.
    Cash Continues to offer superior risk reward relative to stocks/bonds at these prices. Central bank tightening persists and in that light cash rates continue to be bid.
    US Dollar If the Fed is done, then the USD should weaken from here, but that remains to be seen Longer term the Greenback is overvalued and cyclically due to retrace – certainly once US inflation breaks 2.5% on the downside


    To date, investors who have tried to step off the tech train have been premature, a stop too early. The current AI fuelled rally has roots – generative AI, means a step change in productivity. The reality may yet dawn on markets that the real value accrues to the consumer, rather than the producer, yet the Goldilocks regime we believe we reside in still mandates an overweight in technology.

    Even with better net interest margin from higher rates, banks remain plagued by smaller financial institutions required to hold higher capital requirements ( to stem the crises which unfolded earlier in the year) by regulators, and the deposit flight to their bigger brethren. We do not expect a sustained period of outperformance in financials again until such time as we rotate towards a ‘Reflation’ regime.

    However, should that evolve, our process would likely point us to overweighting sectors such as industrials, materials and energy, all of which are beneficiaries of the ‘net zero’ energy transition and attendant infrastructure build – to be clear, this is the biggest construction project the world has ever seen.

    Below we show each of these sectors performance, (relative to that of the S&P 500 US stock market), and wonder is 2024 the year in which the tech train reaches the terminus?

    Figure 3: Four Decades of Sector Booms and Busts

    Each quarter we try to set out our process and current readings on policy, growth, inflation and earnings all with a view to justifying the current asset allocation and sector over and underweights. It’s a tried and tested process that grounds all our decisions in data driven manner.


    To the relief of all, inflation has continued to soften over the course of the year, whilst economic momentum has held up. The primary macro theme during the first half of the year was disinflation – although that was as expected by many. Consumer Prices Indices fell from 9% in June 22, to 3% a year later. The lagged nature of rents/home owner costs, (still on a downwards trajectory), suggests inflation measures will remain muted during the first quarter of 2024.

    Soft in patches, leading indicators point to some of the leaves of the economic summer beginning to take on an autumnal hue, yet there is nothing to trouble the consumer on the horizon just yet. The pass through from huge stimulus spend, including structural upgrades in infrastructure read: energy transition initiatives, reshoring, defence spending) and very acceptable nominal growth rates suggest the coming months will be on balance very positive for risk assets.

    Perhaps the underappreciated risk as this point is the potential for a re-acceleration in manufacturing, global growth more generally and the expected interest rates cuts do not materialise. The ‘higher for longer’ narrative could well yet gain momentum in the coming quarter, as economic momentum and the resilience of the consumer continues to catch some unawares.

    Figure 4: Earnings Expectations turn as Gross Domestic Income bottoms?

    In fact, as reflected in our preferred measure of economic growth (GDI – Gross Domestic Income), rather than GDP – Gross Domestic Product, any recessionary concerns are potentially in the rear view mirror. The US corporate sector has already witnessed a 0.75% contraction, and an earnings recession for global equities that ended in Q3 2023. In fact, the end of the profits recession, approximately 6 months’ after the market bottomed in October 2022, was absolutely in line with historical precedent. In that respect, with nominal growth looking robust, we still recession as the thin end of the wedge; it is the potential for a growth re-acceleration that is underpriced in our minds, perhaps indicated by the very definite upturn in the blue line above.

    Information is based on our current understanding of taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change. Tax treatment is based on individual circumstances and may be subject to change in the future. Although endeavours have been made to provide accurate and timely information, we cannot guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No individual or company should act upon such information without receiving appropriate professional advice after a thorough review of their particular situation. We cannot accept responsibility for any loss as a result of acts or omissions.


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