Global Asset Allocation Perspectives

July 2024

To help guide the positioning of Scotia Portfolio Solutions, the Multi Asset Management team of Scotia Global Asset Management meets regularly to discuss and debate the current macro environment and what it means for portfolio positioning. The following report captures the team’s current views.

Key macroeconomic themes

Global economic themes that are most likely to influence our views on portfolio asset allocation over the next 12-to-18 months.

Global growth will continue to be subdued

As the lagged impact of higher interest rates continues to slow the global economy, growth will likely remain subdued, but positive, for the rest of 2024. Manufacturing activity may weaken in the second half of the year while services remain robust.

More rate cuts on the horizon

The disinflation trend will likely continue in the second half of 2024, but core inflation remains stubbornly high. Several G10 central banks have started to cut interest rates and additional, modestly paced, cuts are likely. A sharper economic contraction will be required to see more significant reductions.

Risks persist

 

The impact of higher for longer interest rates will continue to create risks in financial markets. Should a recession materialize, we do not expect it to be deep or prolonged as the backdrop for businesses and consumers remains strong. Growing geopolitical tensions and increasing polarization pose additional risks to markets.

Asset allocation perspectives

Equities

At this time, we have a neutral view on equities overall relative to fixed income given the abundance of conflicting indicators. 

From an economic activity standpoint, cracks continue to form in housing activity and employment. From a market perspective, fast-growing technologies (cloud, artificial intelligence, GLP-1) continue to mask economic weakness – so much so, that highly concentrated markets remain a key risk, as does inflation, which has come down, but continues to be stubborn.

We remain patient at this time and are keeping an open mind towards taking advantage of any opportunities as they emerge.

Fixed income

Bond yields have risen to start the year, peaking in the spring, as markets shifted on rate cut expectations. Despite moderating inflation, the labour market remains tight, increasing the chances of fewer rate cuts, particularly if monetary policy is ultimately not restrictive enough.

Over the longer term, yields remain attractive, providing a solid foundation for income and capital appreciation once central banks lower interest rates further.

Due to this balance of risks, we have a neutral view on fixed income overall relative to equities at this time. 

Canada

Neutral

We have a neutral-overweight view on Canadian equities. The increase in interest rates has clearly impacted the Canadian economy more than the U.S. economy.  Given this, the likelihood that the Bank of Canada will continue to cut rates before the U.S. is high and may create more positive sentiment towards Canadian stocks. Despite long term secular strength in the economy, Canadian equities remain priced significantly below their American counterparts.

U.S.

Neutral

Despite rate cuts being pushed further out, we maintain our overweight view on U.S. equities. Inflation has fallen considerably from its peak, the economy remains resilient and U.S. equities continue to see positive momentum. Despite stretched valuations, U.S. equities continue to benefit the most from a number of growth themes, namely advances in AI, continued reshoring of manufacturing, and renewed investments in infrastructure.

International

negative

We have a neutral-underweight view on international equities. Europe continues to face increasing political risks, structural headwinds to global competitiveness and is sensitive to weakness in China. Outside of Europe, we are more positive on Japanese equities, in local currency terms, due to the push on corporate reform and the strong demand for Japanese goods and services due to a weak yen. 

Emerging Markets

negative

We have a neutral-underweight view on emerging market equities. China continues to face structural headwinds related to its property sector and deleveraging consumer. Backlash from key export markets, namely the U.S. and Europe, presents further challenges. However, valuations remain compelling in several key emerging markets, including Mexico, Brazil and South Africa, as supply chains are diversified from China to other parts of the world.