PARIS (Reuters) – The economic trajectory of developed countries remains unclear, while the valuation of assets sends contradictory signals, which requires more discernment in the construction of portfolios, estimates at M&G.
Currently, the two main economic uncertainties relate to the dynamics of inflation and the slowdown in the cycle, the extent of which will depend on the resilience of the labor markets.
The latter show signs of slowing down in the United States, but remain dynamic in the euro zone with wage growth of 5.1% over one year in December 2022.
At the same time, valuations are sending mixed signals, with US equities remaining expensive while European valuations are at their lowest level in at least two years and despite their rebound this year.
On the credit side, the overall high-yield rate spread factors in a rise in default rates, but the markets are more worried about the best-rated securities, whose yields imply record levels of default.
Conversely, securities with the lowest ratings include a proportionally more moderate increase in defaults.
“The current situation will not end without damage,” warns Florent Delorme, strategist at M&G.
Equities make up just under half of a dynamic M&G fund’s allocation, in line with the index weighting, with European stocks accounting for a quarter of total equity exposure.
Tech valuations in the US look too high for the manager, who is selling the trend by going short the S&P 500 index and buying back non-tech index constituents.
Sovereign securities represent just under a third of the portfolio, half of which is made up of emerging securities in local currencies, the balance being split between 30-year Treasuries and 10-year Gilts.
Reflecting market uncertainties, unallocated funds represent 11.1% of the portfolio, above the historical average.
(Report Corentin Chapron)
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