Asset Allocation
Republicans are favored but the election is still competitive. Equities, corporate credit, and cyclical sectors will fall until policy uncertainty is reduced.
We are growing positive on Growth assets with recession expectations increasing our optimism on entry points. Equities are led by APAC Private Equity, North America Venture Capital, and Europe Buyouts. Our outlook continues to improve on CRE within the Inflation & Diversification bucket while we are underweight Multi-Strategy amongst Hedge Funds. We maintain an overweight to Senior Direct Lending for Income with a preference for North America.
Don't buy the dip. The equity bull market is over. The US will enter a recession in late 2024 or in early 2025.
In this report, we present the quarterly review of our Model Bond Portfolio. Rebounding growth and political instability led to slightly negative portfolio performance in Q2/2024. As global growth starts to moderate, we continue to favor government bonds over credit. Maintain a defensive portfolio stance.
We project US Multifamily cap rates to increase from 5.2% to 6.5%. While we find an unfavorable risk-adjusted return on the asset, especially relative to other opportunities in CRE, cap rates are moving closer to peak.
In Section I, we examine some concerning signs of US economic weakness that emerged in June. We also discuss portfolio positioning in the face of falling interest rates and cross-check our recommended US equity overweight in the face of extremely optimistic expectations about AI’s impact on growth. We conclude that defensive positioning continues to be warranted. In Section II, we dig into those optimistic expectations for AI. We find that the US equity market is significantly overvalued unless the deployment of AI technology causes a 10-to-20 year productivity surge in line with what occurred during the IT revolution of the 1990s, with persistently high margins on the revenue generated from the improvement in growth. We doubt that AI will end up truly boosting economic activity by this magnitude.
The consensus soft-landing narrative is wrong. The US will fall into a recession in late 2024 or early 2025. We were tactically bullish on stocks most of last year, turned neutral earlier this year, and are going underweight today. We conservatively expect the S&P 500 to drop to 3750 during the coming recession.
We close our overweights to Energy and Aerospace & Defense. The macroeconomic backdrop is deteriorating for Energy. As for A&D, the good news is already priced in.