SMF monthly update

Welcome to your January 2024 update from the Aviva Investors' Multi Asset Team.

Top 3 investment trends – January 2024

1. Soft landing and interest rate cuts

At the end of 2023 markets were incredibly optimistic about the prospect of a soft landing, whereby inflation is tamed without much damage to the economy. As we start the new year that optimism continued, in large part due to strong economic data releases; particularly in the US. That being said, the markets’ expectation for interest rate cuts have significantly tempered. For instance, at the end of 2023 the markets were fully expecting the Federal Reserve to cut interest rates in March, however, by the end of January this had dropped to a likelihood of only 35%. 

2. US and Japanese equities continue their gains

Global equity markets continued to grind higher in January, following the extremely strong returns in November and December last year. The US equity market (S&P 500) hit a new all-time high thanks to the continued resilience of the US economy and the expectation that inflation will continue to fall. It wasn’t all about US equities though. Japanese equities were the strongest performer, with the market (Nikkei 225) reaching the highest level in three decades. Structural reforms and a cheaper yen, which increases the value of the overseas earnings of Japanese companies, all helped to boost returns.   

3. All eyes on geopolitics and elections 

In spite of all the positive news, geopolitics concerns remain ever present. Especially around any potential escalation in the Middle East, particularly from the Houthi rebel attacks in the Red Sea. In terms of politics, Taiwan was one of the more important elections this month and it resulted in a win for the Democratic Progressive Party (DPP), who are pro-independence from China and a pro-US party. This result was expected to be controversial for China, given their ambition for the “reunification” of Taiwan and China, however, so far there doesn’t seem to be any escalation.

How did SMF perform?

Growth assets

Global equities rose due to the strong performance of Japanese and North American equity markets, the performance of other regions on the other hand was more lacklustre. From a tactical asset allocation perspective we are overweight North American and Japanese equity markets, which will have boosted returns.

Defensive assets

Fixed income markets were slightly negative as markets tempered their expectations for interest rate cuts, this follows the extremely strong performance experienced in November and December last year. We trimmed our government bond positions at the beginning of the year following the rally, which will have been beneficial to performance. 

Uncorrelated assets

Uncorrelated assets produced a slightly positive return due to gains from the funds holding in property. 

Key active management decisions in January

Fixed income tactical trades

Closed Australian government bond position at the beginning of the month, following the strong fixed income rally in November and December last year.

At the end of January, we added a new position in German government bonds. This should benefit from relatively slower economic growth, leading to slower inflation and an increased likelihood of interest rate cuts than the markets are currently expecting.

SMF & SMF 2 Fund Price Adjustments (FPA)

There were no fund price adjustments in January.

Market outlook: what do we believe happens next?

From an active asset allocation perspective, we prefer equities given that they have the potential to perform well in a disinflationary environment, where deep recessions (or recessions altogether) may be avoided. Regarding fixed income markets, we expect more price stability than in the previous couple of years, albeit the high number of interest rate cuts already expected by investors certainly reduces our return expectations for that asset class.

In terms of equity regions, we remain overweight the US, Japan and Europe. Although US equities valuations may be high, we believe they will be supported by a relatively resilient US economy and strong earnings generation. Regarding Japanese equities, we continue to see opportunity, as the country finally emerges from decades of deflation coupled with significant corporate governance reforms. European equities look attractive from a valuation perspective.

In terms of our fixed income allocation, we are overweight UK gilts and German government bonds whilst being underweight Japanese government bonds, due to the increasing inflationary pressure that we believe will lead to higher interest rates. Essentially, we believe Japan is at that start of their hiking cycle, whilst interest rates in other economies have peaked. At the end of January, we also added a German government bond position given the relatively weaker growth in Europe than the US, that could lead to more or faster interest rate cuts than the markets are currently expecting.

Key risks

  • The value of an investment and any income from it can go down as well as up and can fluctuate in response to changes in currency and exchange rates.
  • Investors may not get back the original amount invested.
  • The Fund uses derivatives, these can be complex and highly volatile. This means in unusual market conditions the Fund may suffer significant losses.
  • The Fund Invests in emerging markets, these markets may be volatile and carry higher risk than developed markets.

Important information

Except where stated as otherwise, the source of all information is Aviva Investors Global Services Limited ("Aviva Investors"). Unless stated otherwise any opinions expressed are those of Aviva Investors. They should not be viewed as indicating any guarantee of return from an investment managed by Aviva Investors nor as advice of any nature. The value of an investment and any income from it can go down as well as up. Investors may not get back the original amount invested.

For further information please read the latest Key Investor Information Document and Supplementary Information Document. The Prospectus and the annual and interim reports are also available on request. Copies in English can be obtained free of charge from Aviva Investors UK Fund Services Limited, St Helen’s, 1 Undershaft, London EC3P 3DQ. You can also download copies from our website. Issued by Aviva Investors UK Fund Services Limited. Registered in England No 1973412. Authorised and regulated by the Financial Conduct Authority. Firm Reference No. 119310. Registered address: St.Helen's, 1 Undershaft, London, EC3P 3DQ. An Aviva company.