The TCFP investment committee met on 5 March to discuss the current economic, political and investment environment.
As a result the TCFP Model Portfolio remains unchanged.
Here are brief notes of our discussion:
Politics
The big news for 2024 is that half the world is going to the polls. That is unlikely to lead to major changes in fiscal policy or economic trajectory in major economies like US and UK. We are in a world of big tax and big spend and there’s no leader likely to get elected who is going to change that. When the elections come around again in 2028 it might be a very different story.
Similarly conflicts like Israel-Gaza, Russia-Ukraine seem priced in by markets currently, neither the resolution nor escalation of either is likely to bother markets much.
Interest Rates
As expected, interest rates have started to come down from peaks reached in 2022 but market expectations have moderated from 8 cuts to around 3-4 cuts now.
The 10-year US Treasury yield decline from 5% to 3.8% was overdone, 4.4% is neutral level, we are currently at 4.2%.
For the record we expect UK CPI to fall to its target level by mid-2023 and that should allow the Bank of England scope to cut rates later in year.
Inflation & Growth
It is inflation and employment, not GDP, that are the key variables influencing rate cuts. And it is the US that matters most – it is their numbers that drive global asset prices, the recessions in Germany and UK are somewhat irrelevant from that point of view.
All the usual recession indicators like yield curve inversion are alive and well, they have not been timed out yet, although the risk of US recession slightly lower than 3 months ago, and might support taking a bit more equity risk, but we are happy with how things are.
the main reason we see for the US avoiding a recession so far is the massive fiscal stimulus the US has received, which is akin to what a Government would do were it in recession.
TCFP Model Portfolios
All manner of risks are always present but it requires a complete change of narrative for that to affect investment markets and for us to move from our usual 80:20 equity:bond split. We see no such change of any consequence anywhere on the horizon.
Instead we are drifting towards a point where a rebalance might be needed to bring us back to 80:20. Equities have done significantly better than bonds recently which means that our target 80:20 split has drifted towards 82:18.
If equities continue their rise and/or the 10 year US treasury yield rises to 4.4% (which would mean the value of bonds has fallen) then we expect to rebalance all portfolios back to 80:20. The current yield is 4.15%.
We will keep a keen eye on things for now, review again in April and update you then if we do rebalance.
And that concluded March’s meeting. There will be a brief review in a month and then the next formal ICM will be in June.