Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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SaxoWealthCare Quarterly Commentary ESG 2024Q2
Market Rewind
Saxo
Summary: After each quarter you can download your personal quarterly report into your SaxoWealthCare account. In this article we would like to further explain what has happened in the market and how we have responded to this within your profile and portfolio.
Market Review
In the second quarter of 2024, the stock market hit new highs, while bonds stayed mostly the same. Both stocks and bonds were expected to benefit from future interest rate cuts, but doubts arose as concerns about inflation came back and fewer rate cuts were expected. The US was now expected to cut rates only once in 2024, instead of three times as previously thought.
The stock market has been doing well for a long time, mainly because of a few top-performing tech stocks. These seven big US tech companies (Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia, and Tesla) did especially well, gaining 17% in Q2. This helped the S&P 500 index rise by 4.3%. European stocks also did well but not as much as US stocks. Risky investments like credit bonds and emerging market stocks also performed well. Government bonds stayed flat but still offer a good return with decent yields.
In May, US inflation was lower than the previous month, and the European Central Bank (ECB) cut rates once. Business confidence in the service and manufacturing sectors suggests slower growth but not a recession. Higher rates haven't yet reduced consumer demand for mortgages and loans, which is good for the economy but bad for inflation and rate cuts. Unemployment remains low. There is a risk that consumers may struggle with rising prices and higher rates.
So far this year, stocks have done well and have outperformed corporate bonds, which did better than government bonds that had small negative returns.
Portfolio Performance
Fixed Mix Strategies
| 10Y Annualised Return | 10Y Annualised Volatility | Since Inception | Year to Date | Quarter to Date |
Very Dynamic | 10.24% | 11.54% | 21.06% | 12.38% | 3.18% |
Dynamic | 8.74% | 9.41% | 16.84% | 10.29% | 2.66% |
Moderate | 7.20% | 7.44% | 12.65% | 8.23% | 2.14% |
Defensive | 5.62% | 5.78% | 8.52% | 6.19% | 1.61% |
Very Defensive | 4.00% | 4.77% | 4.44% | 4.18% | 1.07% |
Source: Data from Bloomberg, Morningstar, BlackRock, Amundi, from 06/30/2014 to 06/28/2024. Inception date of the strategy is 5/31/2022. Returns are shown in SGD and gross of costs such as management fee and transaction costs but net of ETF costs (TER). Returns are calculated with a monthly rebalance to target allocation. Returns before the launch of the strategy with Saxo are calculated based on the portfolio allocation at the launch date. These historical returns do not attempt to simulate investment decisions that could have been made before the first portfolio was implemented with Saxo. The returns presented are indicative of the returns of individual investors, which may differ slightly.
Global stocks kept going up in the second quarter, while global bonds stayed mostly the same. The stocks and bonds in our portfolios progressed in line with the market.
In the first half of 2024, investors who took more risks saw their assets grow significantly, with returns of +12.4% while conservative investors saw their portfolios grow more modestly.
Portfolio Protector and Goal-Based Strategies
Investors who have opted for Portfolio Protector or Goal-Based strategies have their own unique asset allocation that depends on their individual preferences and constraints. Still, the mix of assets in their portfolios will fall somewhere on the spectrum of the Fixed Mix portfolios since they are composed of the same building blocks for equity and bonds. Hence, we believe the information presented in this report should bring them some light to interpret the performance of their portfolios accordingly.
Portfolio Changes
Equity
The equity portfolio was rebalanced one time in the second quarter of 2024.
This portfolio gives investors a broad exposure to sustainable equities. It aims to outperform global stock markets via dynamic tactical adjustments to the mix of ETFs in the portfolio. These adjustments are done via two investment models: country rotation and factor rotation. Country rotation is implemented through ETFs that track the general market of various countries and represents the biggest share of the portfolio. The rest of the portfolio is allocated to the factor rotation strategy which is implemented through ETFs that select stocks based on a set of attributes associated with higher risk-adjusted returns.
All the ETFs in this portfolio are selected according to ESG characteristics. They follow MSCI SRI indices which were designed to represent the performance of companies with high ESG ratings.
Mid-April
This rebalance was motivated by changes within the factor and regional sleeves.
Within factors, the economic regime signal led to a reduction of the allocation to the quality and minimum volatility factors and an increase of the value and momentum factors. Quality remains the most important factor position in your portfolio supported by strong scores across the board of economic signals and market sentiment indicators. However, the reduction in the position comes as valuations are high. On the other hand, it is worth noting that the momentum factor is the largest increase, based on a strong improvement of the sentiment signals.
Within regions, the allocation to Europe was increased in the portfolio, which reduced the relative underweight compared to the benchmark. This move was based on a positive earnings outlook and analyst expectations. In return the exposure to Emerging Markets and Japan was cut back, reducing the existing overweight. The reduction of the exposure to Japan is motivated by profit taking but keeps an exposure. Finally, the weight of the US was brought up, supported by both signal insights and robust earnings.
Bonds
No changes were made to the bond portfolio in the second quarter of 2024.
This yield-seeking bond portfolio is composed of global government and corporate bonds with a medium duration. The foreign currency exposure is mostly hedged to the EUR in this portfolio. It is designed to invest for more stable returns than equities and to act as a diversifier when equities are down.
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