Higher for Longer, Longer the Stronger

We are leaning into quality as markets start to focus away from near-term tailwinds and onto medium-term headwinds.

As we evaluate a higher-for-longer rates outlook in the U.S. and Europe, and the potential for slowing growth in 2024, the Asset Allocation Committee (“the AAC”) retains its neutral overall view and its “long-the-strong” stances within asset classes. Markets now appear to be focusing on the headwinds that have long dominated our medium-term views. Most notably, core government bond yields have broken out of their 2023 ranges, potentially shaking a key support for equity markets. Our views emphasize quality across markets, while cash and investment grade bonds offer higher-yielding havens as markets seek a new equilibrium in rates and greater clarity on the profile of the growth slowdown.

Long-Dated Bond Yields Appear to Have Broken Out of Their 2023 Trading Ranges

Source: FactSet. Data as of September 25, 2023.

Equity

• The AAC has retained its neutral overall view on equities, and favors defensive positioning including large caps and a bias toward quality; regionally, we prefer the U.S. and Japan over Europe and emerging markets.
• The consumption-led U.S. economy is likely to remain stronger than manufacturing-led economies like Europe and China.
• The AAC still favors Japan, due to attractive valuations, a structural turn to more shareholder-responsive governance structures and culture, and the Bank of Japan’s gradualist approach to policy normalization.

Fixed Income

• The AAC maintained its overweight view on investment grade bonds and cash, and its neutral views on non-U.S. developed market bonds and high yield bonds, while downgrading emerging markets to neutral.
• Recent yield movement has made us more positive on developed market government bonds, although debt-sustainability concerns and the potential for further increases in term premium means we still prefer short and intermediate duration.
• In high yield, selecting quality could offset some of the risk of tight spreads, but we prefer investment-grade duration and some areas of structured credit.
• Growing headwinds for emerging markets corporates mean we favor sovereigns, and Latin America over other regions.

Real and Alternative Assets

• The AAC retained its neutral view on commodities and its overweight views on hedged strategies and private equity and credit markets.
• We favor hedged strategies that have tended to exhibit uncorrelated returns or can take advantage of market volatility.
• While the long-term supply and demand characteristics remain favorable for commodities, the medium-term growth outlook is less supportive.
• In private markets, we continue to see an attractive environment for liquidity-providing strategies such as private debt, as well as private equity secondaries and co-investments, but there could be a shift in this opportunity set as transaction activity begins to pick up.

Market Views: Based on 12-Month Outlook for Each Asset Class

As of 4Q 2023. Views shown reflect near-term tactical asset allocation views and are based on a hypothetical reference portfolio. Views on private market assets reflect the Asset Allocation Committee’s views on the future return potential of new cash commitments, not the future return potential of existing investments. Nothing herein constitutes a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. See disclosures at the end of this publication, which include additional information regarding the Asset Allocation Committee and the views expressed.