Equities and bonds have rallied sharply as a growing number of investors see aggressive monetary easing in 2024. We also believe rates will fall, but not as steeply as markets envisage.

Asset allocation: wary of Goldilocks reflation trade

2023 began with prospects for the global economy darkening The fear was that runaway inflation and higher interest rates would trigger a worldwide recession. A year later, and investors are facing a remarkable change in the economic landscape.

The global economy may be slowing, but it remains resilient enough to avoid a hard landing. Inflation is declining around the world, albeit with bumps, which will encourage most major central banks to terminate their tightening campaign and start cutting interest rates in the coming months. Expectations for such a Goldilocks scenario have given rise to a powerful reflation trade across asset markets in recent weeks. But we have reasons to be cautious - not least because investors appear to be getting ahead of themselves at a time when end-year market dynamics may be distorting prices.

This is why we prefer to be benchmark weight in our asset allocation, downgrading bonds to neutral and upgrading cash to neutral. We remain neutral in equities.