Balanced ETF portfolios EUR Q1 2024 commentary
| Asset classes | Developed and emerging market stocks and bonds, commodities |
| Instruments | ETFs |
| Investment style | Asset Allocation |
Quarterly net returns*
| Conservative | +1.03% |
| Moderate | +3.92% |
| Aggressive | +7.56% |
Market review
Over the first quarter of 2024, financial markets saw mixed performance. Equity markets and riskier fixed income assets produced positive returns, whereas the higher quality end of the fixed income spectrum ended the quarter in negative territory. Upside surprises in economic data spurred investor appetite for risk assets. Contrarily, stickier than anticipated inflation prints served to push out expectations for the timing of interest rate cuts to the second half of the year and reduced the number of expected interest rate cuts for 2024 by half, which ultimately drove bond yields lower. Geopolitics also loomed in the background with the Gaza war, Russia’s invasion of Ukraine, and US-China competition posing potential tail risks, however not to an extent as to derail the market momentum.
Developed Market Equities performed strongly across the board. Japan emerged as the top-performing market, owing to a combination of a weaker yen and a series of government reforms, including the termination of their negative interest rate policy. US Equity market returns continued to display signs of concentration, however the “Mag Seven” saw some divergence with Nvidia, Microsoft, Meta and Amazon serving as core positive drivers of index returns, whereas Apple and
Tesla finished the quarter in negative territory. European Equities lagged their Developed Market counterparts, yet saw a strong rally in March as stronger economic data and attractive valuations drove positive investor sentiment for the region.
Emerging Market Equities broadly lagged Developed Markets over the quarter, however Chinese equity markets rebounded strongly, following brighter economic activity data and supportive interventions from the People’s Bank of China. From a sector perspective, Communication Services, Energy and Technology led the way, whereas Real Estate provided negative returns.
Fixed income markets saw mixed performance throughout the quarter. Sovereign Bonds and Investment Grade Credit provided negative returns, as the timing of interest rate cuts was pushed out to the second half of the year and the number of cuts reduced by over half. Global High Yield provided positive returns, however, benefiting from lower interest rate sensitivity and the prospect of easing financial conditions.
Elsewhere, the performance of commodities was strong over the period. Oil prices rose significantly off the back of tightening global supplies, better than expected consumption, and geopolitical risks, notably in Russia and the Middle East. Despite a stronger US dollar, the prospect of interest cuts in the second half of the year was enough to spur a rally in Gold. Strong central bank buying and safe-haven inflows amid growing geopolitical tensions also boosted demand for the precious metal.
Lastly, the Euro (EUR) remained flat compared to the US Dollar over the month: from 1.08 USD as of February month-end to 1.08 USD as of March month-end.
Performance
In March, as well as over the full first quarter, we saw risk assets strongly performing thanks to growing hopes for a soft landing and general optimism. As such, the portfolios delivered strong positive returns overall.
Within the equities sleeve, US equities were the major contributors, followed by smaller positive returns coming from Asia Pacific and Europe regions. EM equities also contributed.
Within fixed income, we saw detractions coming mainly from European government bonds and US treasuries with longer maturities. Instead, credit provided some relief to the fixed income allocation, thanks to the recovery seen throughout March, and ended the quarter flat. This mixed performance was mostly on the back of more persistent inflation and fewer rate cuts expected.
Lastly, our commodities acted once again as a good diversifier and delivered additive performance.
Portfolio Allocation
Latest rebalance rationale
A risk-on stance is being maintained as the macro landscape remains strong, supported by a strong earnings season. Small cap equities are introduced into the portfolio on the back of attractive valuations. Credit risk is increased by taking advantage of attractive spreads offered by European corporate bonds.
At the beginning of the year, a positive outlook on equities was maintained, given a resilient macro landscape, particularly in the US. In this rebalance, the stance remains risk-on, with expectations of a strong earnings season and positive forward guidance from corporations, particularly from the largest tech names, likely propelling markets higher.
Within the equity sleeve, the allocation to US equities is being increased, as earnings have remained robust. Moreover, the earnings-based systematic signal that tracks analyst expectations continues to favour the region over Europe.
An allocation to World Small Cap equities is being introduced to diversify from the US tech-driven rally, given the different sector composition. In keeping with the risk-on view, small cap equities are also likely to benefit from a resilient economy and a downward trend in inflation. The Japanese equity allocation is being trimmed to take some profits, and the position in Global clean energy is closed, as particularly strong catalysts supporting the position in the near term are not seen.
Within the fixed income sleeve, the duration in the portfolio is being trimmed, and a preference is being expressed to take on more credit risk, given the expectation for a resilient economy and continued investor demand for credit issuance. In keeping with previous rebalances, exposure to inflation-linked bonds is being reduced. A preference for EUR duration over USD duration is being expressed, as inflation in the US is seen remaining sticky and the US economy generally being more resilient.
Within credit, the allocation to EUR-denominated high yield and investment grade credit is being increased due to the attractive spreads offered by European corporates relative to other regions. The local currency EM debt allocation is being trimmed in favour of hard currency EM debt, given attractive spreads in the latter.
Lastly, the commodities allocation is being kept unchanged.