Aviva Investors has moved overweight duration for the first time in three years as it believes the rate hiking cycle has concluded, as well as moving overweight UK and European government bonds.
According to the asset manager’s latest quarterly House View, its allocation for 2024 is to be overweight on government bonds with a focus on UK and Europe while remaining neutral on US and Australian ones and underweight on Japanese ones. It is also neutral on corporate bonds.
The decision to move overweight duration reflects a belief that the rate hiking cycle has concluded, it said, with rate cuts expected by the major central banks this year.
It expects the European Central Bank (ECB) will be the first to cut rates, possibly as soon as early Q2. The Federal Reserve is expected to follow soon after, while the Bank of England could start cutting in Q3.
“Our biggest change in terms of asset allocation views is on duration, where for the first time in three years we prefer to be overweight. That reflects our view that the rate hiking cycle has concluded, and rate cuts can follow in 2024.
“The balance of growth risks is likely skewed to the downside, while inflation risks are more muted, making duration more attractive – even with a downward-sloping yield curve.”
The asset manager’s chief economist and head of investment strategy, Michael Grady, highlights its approach to a “new normal” once interest rates stabilise.
“We expect a ‘soft-landing’ disinflation that should only require a neutral policy stance, rather than an accommodative one,” Grady said.
“But even delivering that through 2024 would require 200–300 bps of rate cuts depending on the economy. We expect that the long-term interest rate environment will be very different to the post-GFC years, with neutral nominal rates around 2 to 3 per cent.”
Aviva Investors has also moved overweight on equities with a larger overweight on US and Japanese ones, and smaller ones on Europe and the UK.
“We prefer to be overweight equities, although we are very conscious of the downside risks to nominal demand growth in 2024. In our central scenario we expect solid, if unspectacular, earnings to be the key for equity markets in 2024.
“If we indeed have seen the peak of rates and the trough of earnings, this suggests a positive scenario for equities going forward.
“The US has gone through an earnings downturn earlier than other geographies, beginning in 2022, which was mainly margin-driven. It now appears to have come out on the other side of it and earnings have been growing again in recent months.”
