Downside risks to US equities ‘warrant a more cautious allocation’ says Shard Capital

by | Apr 23, 2024

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Shard Capital shares its latest asset allocation overview on the risks and opportunities their teams are seeing in global markets at present

Equities

A strong March ensured equity markets finished Q1 well into the green, with China being the only major economy where concerns remain high and sentiment weak. Whilst we recognise concerns, we believe China is undervalued and opportunities for active managers should be significant over the next 3 to 5 years. On the topic of value, we recently moved to an overweight in UK equities, and remain significantly overweight Japan, both markets had a very strong March.

Further west, and the soft-landing narrative is now well and truly baked into US equity markets. Given valuations, sentiment and profit expectations, we remain underweight US equities. Whilst we maintain conviction in our healthcare and technology related themes, heavily biased to the US equities, the downside risks and absolute size of US equities in global indices, warrants a more cautious allocation.

 
 

Fixed Income

The markets optimism in the soft-landing narrative is very much dependant on rate cuts, which we believe is unlikely in the absence of a significant deterioration in labour data or a credit crisis. This implies rate cuts is more dependent on inflation data, which has proven much stickier than markets expected 6 months ago. Inflation breakeven data have also been rising, which supported our inflation-linked bond exposure.

We like the absolute yield on offer on shorter-dated Government bonds, retain healthy exposure to longer dated Gilts and Inflation-linked / TIPS exposure in the US. Credit spreads remain very tight and given the significant rise in interest rates and material refinancing risks, credit markets are not being priced accordingly and we remain underweight.

 
 

Real Assets

WTI and Brent continues to trade in the 70s to 90s range, a level likely sustainable in the absence of escalations in the middle east or Ukraine. Natural Gas and copper remain weak, we believe an indication of slacking demand. Gold was the standout performer in March, the biggest contributor in portfolios and the only commodity we are overweight.

We see $2000 as the new floor, with the price in a strong medium-term upward trend, the upside could be very significant. Given half the world will vote in national elections this year, we especially like the hedge it provides against monetary devaluation and event risk.

 
 

Specialist Strategies

Our specialist strategies continue to play a significant stabilising role within our portfolios. Our managed futures & trend following exposures had another very strong month and are up between 5% and 15% in Q1.

We retain significant conviction in their role in our portfolios. As mentioned previously, we specifically retain conviction in the sustainability of the competitive advantage of the strategies we own, and the alignment of interest between the managers, and us and our clients. As for private markets exposure, we retain limited exposure to these, both credit and equity, given our concerns regarding debt and the refinancing cycle.

 
 

Currencies

We remain broadly neutral on currencies. On the margin we note that growth and inflation expectations could support a weaker USD. However, the US Dollar remains the global reserve currency of choice, and in a severe market dislocation, we expect it to strengthen. We retain our positive view on the Japanese Yen, which we believe is undervalued and offers significant optionality alongside the potential catalysts for a revaluation.

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