Latest asset allocation views

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Manulife Investment Management's Multi-Asset Solutions Team is the multimanager and strategic asset allocator behind the John Hancock target-date funds and model portfolios. Every quarter, the team compiles a 5-year and long-term (20-year-plus) analysis of expected asset class returns. This analysis covers all asset classes globally that the team analyzes on a regular basis although not all asset classes are represented within all strategies managed by the team.

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Asset allocation views: balance of risks tilt to the downside

Although the tightening cycle is over, markets are diverging as some major central banks near rate cuts, while the U.S. edges further away from the likelihood of multiple interest-rate cuts in 2024. Concerns remain about the balance of risks being to the downside.

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Key global themes

Three key themes for the months ahead underscore persistent uncertainty as global growth desynchronizes.

Major central banks are getting closer to cutting rates, but they aren’t there yet
- The tightening cycle is over and now attention turns to the timing of easing cycles. Major central banks have signaled that rate cuts are the next probable step, contingent on inflation continuing to moderate.
- However, persistent above-target U.S. inflation has led to a significant decrease in expected rate cuts domestically. Our outlook on assets poised to benefit from lower rates, such as core bonds and U.S. small-cap equities, has shifted as a result.
- While major central banks, including the U.S. Federal Reserve (Fed), European Central Bank (ECB), and Bank of England have held rates steady or are preparing to cut, other countries, including Brazil, Mexico, and, most recently, Switzerland, are already cutting rates.
Global growth continues to see significant desynchronization
- U.S. growth has defied expectations, remaining robust despite elevated interest rates, leading us to overweight U.S. equities. In contrast, other developed economies have flirted with recession, including the United Kingdom, Canada, Germany, and Japan.
- Desynchronized growth continues globally as well as within national borders where growth diverges between resilient services sectors and the manufacturing sector, which is just now exiting a prolonged recession.
- Amid challenges, there are numerous potential opportunities, particularly in Asian markets where diverse prospects such as manufacturing in South Korea and Japan, commodities in Indonesia, and domestic growth in India are prevalent.
Concerns remain around risks to the downside
- Although our market outlook is generally positive—reflected in our overweight in equity versus fixed income—we believe that the balance of risks remains to the downside.
- The next few months are likely to see upward pressure on U.S. interest rates. With no imminent reprieve from higher rates, more indebted parts of the market could experience strain, posing challenges for assets such as high-yield credit, small-cap equities, and real estate.
- Elevated valuations add to the risk of deeper drawdowns should a slowdown in current or forecast earnings occur; however, valuations alone aren’t historically a good predictor of near-term market movements.

Source: Manulife Investment Management, May 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

We continue to favor equities over fixed income as economic growth and corporate earnings growth remain resilient amid a higher interest-rate environment. A reduction in the number of interest-rate cuts expected in 2024 has dampened the outlook for fixed income. Downside pressures remain a risk to this view.