St James Place Upgrades Outlook To "Soft Landing" From "Muddling Through"

Amanda Cheesley Deputy Editor 16 April 2024

St James Place Upgrades Outlook To

The UK-listed wealth management house, with offices in Hong Kong, Singapore and the United Arab Emirates as well as in its home country, is taking a mildly more positive approach to the global economic outlook.

Justin Onuekwusi (pictured), chief investment officer at St James’s Place, has just updated his base case view to a soft landing from "muddling through", citing factors such as improved sentiment data, closer moves to interest rate cuts and continued fiscal support.

One of the largest wealth managers in the UK, SJP's positions carry weight. SJP had a total of £168.2 billion of assets under management at the end of 2023.

By "muddling through", the UK-listed firm had defined this as a forecast range of -0.5 per cent to 0.5 per cent in the next 12 to 18 months, while a "soft landing" counts as anything between GDP growth of 0.5 to 2.0 per cent. 

“Central banks have some work left to do on inflation but once rate cuts begin, they should be able to be more aggressive,” Onuekwusi said in a note. “Further ahead, elections this year keep uncertainty high, especially on fiscal policy.” 

“We are still late cycle in the US and floating close to a technical recession in Europe. The UK fell into a technical recession in the latter part of 2023. Deep recession seems unlikely now as rate pass through not been as detrimental as expected,” he continued.

“Investing late cycle is always difficult. Historically, risky assets perform well in this period. However, volatility can increase as markets assess the likelihood of a recession,” Onuekwusi said. He has a neutral view on equity risk but has a bias away from richly-valued US assets.

United States
Onuekwusi highlighted that the US economy has continued to perform well, and recession risks have receded further. As such, he believes the base case is now a more positive soft landing where growth moves broadly sideways, unemployment stays low, and inflation gradually moves closer to target. This is in line with consensus.

“While the labour market remains tight, a gradual softening in openings is dampening the risk of unemployment rising suddenly,” Onuekwusi said.

“The market continues to expect three cuts in US interest rates this year as the Fed seeks to normalise policy,” he added. In recent months, market pricing has reflected his view that the consensus was too aggressive in its forecast for rate cuts (as many as six to seven cuts were priced in January). “Questions remain whether rate cuts will commence in the first half of the year. Although inflation across the world is still generally above target, the November US election probably pulls forward the timing,” he added.

A key tail risk he sees as problematic is the gap between the US deficit and unemployment rate, which risks heightened US bond market volatility, which could spill over into the gilt market. He noted, albeit cautiously, that volatility on average tends to be higher in US election years.

“China is adding stimulus, though with slowing tax revenues this is adding to the government’s deficit,” Onuekwusi said.

The Chinese authorities recently confirmed the 5 per cent GDP target and 3 per cent inflation target. Given the absence of consistent data, there are challenges in accurately measuring China's GDP. This means we may never know whether the target has been achieved. “Nevertheless, the focus is moving away from the traditional manufacturing sector and more towards high end tech and artificial intelligence. This is likely to be a big structural theme in coming years,” he said.

Emerging markets
“Emerging Market Purchasing Managers' Index – an economic indicator that gauges the health of the manufacturing and service sectors – remains higher than the developed market aggregate across the major sectors,” Onuekwusi said. “Lower inflation in emerging markets and upcoming US rate cuts should continue to support overall emerging market growth,” he added.

Asset allocation
Global emerging market equities have been reduced from extremely attractive valuations to attractive valuations, Onuekwusi said. This reallocation has funded an increase in global developed equities (ex-US) from valuations not being sufficiently distinct to attractive valuations. Although emerging market equities have the highest mean expected return over a medium-term horizon, the range of outcomes is wide and exposure to idiosyncratic risks relatively high, he continued. Given that all major developed equity markets offer a significant valuation discount to the US, it is prudent from a diversification perspective to spread their active risk.

Global high yield has been reduced from attractive valuations to valuations not being sufficiently distinct. This reallocation has funded an increase in global equities (ACWI) from unattractive valuations to valuations not being sufficiently distinct. Following a contraction in global high yield credit spreads, he proposes closing the overweight position in this asset class, which is funded by a modest underweight to global equities. Although the yield-to-worst of the high yield market relative to equities appears attractive, this is driven by rising sovereign bond yields, he said. The reward for assuming lower quality credit risk at this junction does appear slight, he concluded.

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