^{Multi-asset solutions team}

Our latest asset allocation views

October 2024

Asset allocation views: a variable growth outlook

Global growth remains variable across geographic regions, but opportunities in equities and fixed income remain as global central bank easing takes hold

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Key global themes

Sailing on rate cut waves: an easier Fed policy amid slowing growth with a more synchronized easing cycle among central banks globally.

Monetary policy is easing, but how far and fast it goes is the question

The U.S. Federal Reserve (Fed) has definitively shifted from its sole focus on inflation to also supporting full employment. As such, with jobs and economic growth cooling, we expect a faster pace of easing than what the Fed has telegraphed. We see a Fed funds rate of 4.25% at the end of 2024 and 3.00% at the close of 2025.
This clearer policy path could result in a more synchronous global easing cycle as a weaker U.S. dollar prompts rate cuts from central banks—particularly in emerging markets—that have been somewhat constrained from easing by recent U.S. dollar strength.
That said, specific factors are still at play for many policymakers. The European Central Bank and Bank of England are contending with stubborn inflation, while the Bank of Canada faces sluggish domestic demand and the possibility of weak inflation. The Bank of Japan has actually raised rates twice this year, and Brazil Central Bank has increased rates due to inflation. Among other emerging markets, Bank Indonesia has begun cutting rates as the Rupiah stabilizes against the U.S. dollar.

United States: regardless of the landing, we’re likely to experience turbulence on the way down

For months, there has been a debate about whether the U.S. economy would experience a hard landing, a soft landing, or no landing at all. We’ve maintained that no slowdown is highly unlikely given the massive monetary policy tightening of the past two years. Recent U.S. data has broadly shown deceleration, taking the "no landing" concept off the table.
Outside of household consumption, most sectors of the U.S. economy have slowed, including housing, business investment, and international trade. We also see limited upside potential for consumption: With labour demand slowing, we expect a moderate hit to income and consumer confidence, which would ultimately weigh on households’ ability to spend.
The question now is whether the U.S. slowdown will be limited to a modest deceleration or a more pronounced deterioration. So far, the data has moderated at a reasonable pace. If a more benign business environment unfolds, easier monetary policy should ultimately be a positive for risk assets. There is, however, an important caveat: We DO expect volatility around disappointing macroeconomic data as markets adjust to the odds of a weak growth environment.

Global economies have already softened; the global trade cycle will become an important theme

While the discussion around whether or not the United States can stick the landing is alive and well, we would note that large parts of Europe, the United Kingdom, Japan, Canada, and China have all experienced underwhelming, and comparatively weaker, growth at various points over the last six quarters.
With the United States slowing, we expect global trade volumes will continue to slow–an outcome already reflected in business surveys such as global PMIs. This is especially the case given the limited scope from China for improved domestic demand compounding any global slowdown. Consequently, any country-level assessment should include careful consideration of its exposure to the global trade impulse.
Given the divergence in policy and macroeconomic data across economies, it's essential to maintain vigilance and carefully review portfolio positioning on a regular basis.

Source: Manulife Investment Management, October 2024. These views are updated on a quarterly basis. This commentary is provided for informational purposes only and is not an endorsement of any security, mutual fund, sector, or index. No forecasts are guaranteed.

Active asset allocation views

Asset class overview Broad equity Regional/sector-specific equity Fixed income Private markets

Asset class overview

• While plenty of opportunities remain in both equities and fixed income, we've shifted to a neutral stance. This is due to elevated equity valuations and weakening macroeconomic conditions in business, trade, and the labour market, and despite resilient yet slowing corporate earnings growth.

• Volatility remains amid a complex macroeconomic landscape where geopolitical risks and a global growth slowdown are potential headwinds for riskier assets going into Q4 2024.

As of September 30, 2024, from a broad asset-class overview perspective, Manulife Investment Management’s Multi-Asset Solutions Team has a neutral stance on both equities and fixed income. — Source: Multi-Asset Solutions Team, Manulife Investment Management, as of September 30, 2024.

Broad equity

We’ve shifted from an underweight to a neutral position in Canadian equities due to improving earnings growth and attractive valuations compared to other developed markets. The Bank of Canada’s dovish stance on rate cuts could be the potential catalyst for these benefits.
While we remain overweight in U.S equities—supported by positive earnings growth and an easier Fed policy—the magnitude of this overweight position has moderated compared to our stance last quarter, as growth has slowed relative to other developed markets.
While equities outside North America benefit from attractive valuations, well-contained inflation and gradual growth recovery, their weak earnings outlooks, alongside international and domestic political headwinds, warrant a neutral stance.

As of September 30, 2024, Manulife Investment Management’s Multi-Asset Solutions Team has an overweight stance to U.S. equities and a neutral stance on Canadian equities, non-North American developed-market equities and emerging-market equities. — Source: Multi-Asset Solutions Team, Manulife Investment Management, as of September 30, 2024.

Regional/sector-specific equity

Our view on U.K. equities remains neutral but is leaning more positive due to historically low valuations, attractive yields, and improving growth. Despite structural post-Brexit challenges and policy uncertainty, the economic recovery appears more resilient compared to the euro area, and recent capital flows have turned positive.
While over the intermediate term we favour Japanese equities, we have a neutral view over the short term, and so have adjusted our view from overweight. Volatility of the yen, which is increasingly being driven by both international and domestic monetary policy, is tempering outperformance of the asset class.
Our view in Chinese equities remains neutral, as we acknowledge their compelling valuations and intensified policy efforts to thwart ongoing deflationary forces. However, weakness in real estate and domestic consumption alongside a lack of substantial fiscal stimulus are headwinds for Chinese equities. As such, much of our positioning is biased to the downside.
We've upgraded Asia-Pacific ex-Japan to overweight as we see relative investment opportunities in select countries, which are likely to benefit from a manufacturing recovery and accelerated rate cuts following the Fed's easing path.
Despite improved valuations, we’ve shifted our view from overweight to neutral in commodities, as concerns from both the demand and supply sides present near-term risks.

Taking a regional and sector-specific view, Manulife Investment Management’s Multi-Asset Solutions Team has an overweight view on U.S. small-cap equities, Japan equities, non-Japan Asia-Pacific equities and infrastructure equities. It has a neutral stance on both United Kingdom equities and non-U.K. European equities, and also has a neutral view of equities in emerging Latin America, Mainland China, Hong Kong, real estate investment trusts and commodities. — Source: Multi-Asset Solutions Team, Manulife Investment Management, as of September 30, 2024.

Fixed income

We remain neutral in investment-grade debt as we believe the tightness of current spread levels doesn't provide ample cushion in the face of a credit risk event.
We favour leveraged loans over U.S. high yield as they can offer more attractive spread and yield carry, providing a better risk/reward balance. Leveraged loans issuers have adjusted to higher short-term rates compared with bond issuers.
Within Asia, we prefer high-yield credits over investment-grade credits due to their more attractive valuations and favourable spreads compared to historical averages. Additionally, default rates are likely to normalize following years of credit stress. Non-China high-yield credits present resilient and solid credit fundamentals.
We still maintain an overweight stance in emerging-market debt due to the potential for EM currencies to appreciate if the Fed delivers on cuts. That said, spreads have tightened, and future downward revisions could be possible.

Private markets

The private real estate sector outlook is mixed with Europe and Canada still exhibiting signs of recovery. Higher financing costs and tighter credit conditions in the United States continue to challenge transactions and refinancing ability.
Our view is positive in global infrastructure due to strong structural trends such as digitalization and decarbonization driving massive demand for data centers and renewable power. This demand is further supported by significant government backing amid rising geopolitical risks, despite potential challenges in power supply infrastructure development.
Private credit continues to offer attractive yields even as the Fed begins to cut interest rates. The asset class is still on a growth trajectory and has emerged as a solution for assets no longer financed by the traditional banking system.
We see near-term headwinds in private agriculture due to high input costs, softening commodity prices, and geopolitical uncertainties. However, the long-term outlook remains positive with strong intrinsic demand driven by population growth, favourable demand supply dynamics, and normalized trade relations.

Asset class focus

Building a little defense into portfolios

While global monetary easing should provide continued growth opportunities across equities and fixed income, current valuations and continued geopolitical uncertainty are burnishing the appeal of defensive plays.

At a time when we’re seeing peak-level U.S. equity valuations, tight credit spreads, continued uncertainty in the geopolitical environment, and wider dispersion in markets, there is value in taking a more cautious approach. That said, we believe opportunities still exist across both equities and fixed income.

Within the United States, there is an opportunity for healthcare and financials, and we still feel the large-cap growth story has some legs. Japan is enjoying improving fundamentals and reasonable valuations, and it stands to benefit from positive corporate governance reforms. Outside of Japan, Asia-Pacific is well-positioned as a defensive play within a slower growth, manufacturing-led world.

In fixed income, we continue to shift our preference toward high-quality investment-grade credit, and we see the appeal of floating-rate fixed income over high-yield bonds. Lastly, while we’ve cooled somewhat on broader commodities, exposure to gold remains appealing due to geopolitical uncertainty and favourable supply-demand dynamics.

Credit spread tightness

This line chart compares government bond and corporate credit yields over the past twenty years and shows that spreads have tightened since 2020, but that they also tend to widen during recessions. — Source: U.S. Federal Reserve, Macrobond, Manulife Investment Management, as of September 10, 2024. The gray areas represent recession.

Asset class returns

Asset class returns comprise the Multi-Asset Solutions Team’s expectations of how different asset classes may perform over a 5-year and long-term (20-year-plus) time horizon.

Expected returns

^{Source: Multi-Asset Solutions Team, Manulife Investment Management, as of October 31, 2024. Not all asset classes with forecasts are represented in every portfolio managed by the Multi-Asset Solutions Team. Data shown in the tables reflects the most recent data available. Asset class forecasts comprise inputs driven by proprietary Manulife Investment Management research and are not meant as predictions for any particular index, mutual fund, or investment vehicle. To initiate the investment process, the investment team formulates 5-year and 20-year plus risk/return expectations, developed through a variety of quantitative modeling techniques and complemented with qualitative and fundamental insight. Assumptions are then adjusted for a number of factors. This chart contains forecasts reflecting potential future events and is only as current as of the date indicated. There is no assurance that such events will occur, and the actual asset class return may be significantly different than that shown here. This material should not be viewed as a recommendation or a solicitation of an offer to buy or sell any investment products or to adopt any investment strategy. It is not possible to invest directly into an index. Past performance does not guarantee future results.}

Multi-Asset Solutions Team

Nathan W. Thooft, CFA

Chief Investment Officer, Senior Portfolio Manager, Multi-Asset Solutions Team

Robert E. Sykes, CFA

Senior Portfolio Manager and Head of Asset Allocation, U.S., Multi-Asset Solutions Team

James Robertson, CIM

Senior Portfolio Manager, Head of Asset Allocation–Canada, and Global Head of Tactical Asset Allocation, Multi-Asset Solutions Team

Luke Browne

Senior Portfolio Manager and Head of Asset Allocation, Asia, Multi-Asset Solutions Team

Geoffrey Kelley, CFA

Senior Portfolio Manager, Global Head of Strategic Asset Allocation and Systematic Equity, Multi-Asset Solutions Team

Benjamin W. Forssell, CFA

Client Portfolio Manager, Global Multi-Asset Team, Multi-Asset Solutions Team

Eric Menzer, CFA, CAIA, AIF

Senior Portfolio Manager and Global Head of OCIO and Fiduciary Solutions, Multi-Asset Solutions Team

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Important disclosures

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.

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