Strategic repositioning
The economic impact of the US-Iran war will continue to be felt for the time being, despite the two countries having reached an agreement. Meanwhile, semiconductor stocks have rallied strongly recently, while bond yields have climbed since the start of the year. Against this background, we are shifting our asset allocation. Firstly, we are reducing our position in emerging markets from overweight to neutral, while increasing our position in developed markets from underweight to neutral. As a result, we reposition risk while keeping a neutral overall position in equities. Finally, we have slightly reduced our position in gold, although we remain positive about this precious metal.
- Equities: taking profit in emerging markets
- Gold: reduce allocation as momentum fades
When we entered the overweight position in emerging markets earlier this year, equity valuations in this region were more attractive than in developed markets for key sectors such as IT and industrials.
Equities: taking profit in emerging markets
However, because of the strong rally in emerging market equities, valuations in that region are now higher than in Europe and Japan. Additionally, while the economic outlook for emerging markets remains resilient, higher energy prices triggered by the closure of the Strait of Hormuz – even though it might reopen soon – have a relatively strong impact on emerging economies. This reduces the attractiveness of the region, despite solid headline growth. Therefore, we are reducing our position in emerging market equities from overweight back to neutral.
Simultaneously, developed markets offer more balanced and diversified earnings dynamics, as more sectors in developed markets have bright growth prospects. This justifies a more neutral and broadly allocated stance. Therefore, we use the proceeds of the reduction in emerging markets to increase our position in developed market equities back to neutral. Within developed markets, we continue to prefer US equities over their European counterparts. US equities stand to profit more from the high AI investments that boost the economy.
Gold: reduce allocation as momentum fades
The uptrend of gold has faded in recent months. Especially a rise in bond yields has put the precious metal under pressure, as higher yields made gold less attractive in comparison. Additionally, the correlation between gold and equities has increased recently. As such, gold’s role as a portfolio diversifier has diminished. However, the long-term case for gold remains strong, especially with central banks on balance continuing to buy gold. Therefore, we are reducing our gold position slightly and remain positive on the precious metal.
Conclusion
Although the economic outlook for emerging markets remains fundamentally sound, equity valuations in the region have increased. In addition, emerging economies are relatively strongly affected by the energy shock from the closure of the Strait of Hormuz. Given this combination of factors, we have decided to reduce the position in emerging market equities from overweight to neutral. We use the proceeds to increase our position in developed market equities from underweight to neutral. We remain neutral on equities overall.
Simultaneously, we see higher yields as a headwind for gold. That said, we are still positive about gold’s long-term outlook and its benefits for portfolio diversification. Therefore, we are reducing our position in the precious metal but retain a positive view.
Richard de Groot
Chair Global Investment Committee