With recent events shaping the financial markets, a client has asked if a rebalancing of his portfolio is needed.

He saw the signs. The Bangko Sentral ng Pilipinas (BSP) has just cut its policy interest rate by another 25 basis points (bps) and we expect another 25-bp cut at the BSP’s next meeting in December.

Similarly, the US Federal Reserve has two more meetings in November and December, and we expect the Fed to cut its rate by 25 bps at each meeting. Both central banks are then expected to cut rates further by 100 bps in 2025, bringing Philippine and US policy interest rates to 4.75% and 3.5%, respectively.

Throughout much of this year, our recommended asset allocation strategy had been 70% fixed income and 30% equities. Investors who were able to buy most of their long-term bonds in 2022, 2023, and the first half of 2024 should already see the price gains in their portfolios in addition to the accrued coupons.

As for equities, even a minimal exposure still would have benefited from the year-to-date gains in the Philippine Stock Exchange Index (+15%) and the S&P 500 (+22%).

However, we think it is time to gradually approach an asset allocation strategy of 45% fixed income and 55% equities this 4th quarter. Here are three key reasons why we think so:

1. Monetary easing can boost the economy

Lower interest rates are expected to bring relief to both households and businesses alike. Consumer loan rates on homes, vehicles, and credit cards should reprice lower, allowing households to spend on more goods and services.

This growth in demand is ultimately good for businesses, which also benefit from lower interest rate expense, encouraging greater spending on equipment, inventory, and labor. Expect investors to flock to companies that can report sustainable earnings growth and attractive dividend payouts.

2. Higher Risk = Higher Potential Return

In our article Ask Your Advisor: Are 4% bond yields a good deal?, we said that 4% per annum net returns on peso and US dollar bonds remain an attractive level to buy given our view of further central bank easing. But aggressive investors are willing to take on more risk beyond the realm of fixed income in search for greater returns.

We have already started to see this phenomenon in the Philippines. As “risk-free” US Treasury bond yields fall, foreign capital flows into emerging markets such as the Philippine Stock Exchange.

And despite being home to the safest government security in the world, risk-taking is just as present in the US as investors bet big on developments in artificial intelligence (AI). The gains in major US equity indices continue to be dominated by large tech companies also known as the Magnificent Seven: Apple, Microsoft, Alphabet, Amazon.com, Nvidia, Meta Platforms, and Tesla.

Even though AI has not yet translated to a substantial increase in these companies’ earnings in the short-term, investors are in for the long game in hopes that the technology will transform the future of business.

3. An opportunity to rebalance

Prudent investors should regularly revisit and review their investment portfolios to make sure that their current mix is still aligned to the current market environment to mitigate risks and capitalize on growth opportunities in other asset classes. It is all part of a process to achieve optimal asset allocation, which should be done quarterly, semi-annually, annually, and whenever market conditions are ripe for rebalancing.

With the reduction in fixed income allocation from 70% to 45%, investors can start taking profit on bonds that have significantly appreciated in price, thereby locking in and realizing the cash gains. A portion of the proceeds may also be reinvested to increase equity holdings from 30% to 55% of the portfolio. For those who still have a strong conviction in the bond story, they can likewise deploy excess cash to purchase equities to reach the target allocation.

This move does not have to be immediate and our portfolio managers at Metrobank Trust Banking Group recommend gradually shifting from fixed income to equities. With uncertainty surrounding tensions in the Middle East and the upcoming US presidential elections on November 5, we could see potential pullbacks in Philippine and US stock markets, which may open up new opportunities for investors to enter equities.

If you are a Metrobank client, there is a wide selection of fixed income and equities products you can explore to attain this new 45/55 fixed income-equities asset allocation strategy. You may consult your relationship manager or investment specialist for a proper review and discussion of the next steps.

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EARL ANDREW “EA” AGUIRRE  is the Head of the Investment Counselor Department under the Financial Markets Sector of Metrobank. He has over 10 years of experience in foreign exchange, fixed income securities, and derivatives sales. He has a Master’s in Business Administration from the Ateneo Graduate School of Business. His interests include regularly traveling to Japan and learning its language and culture.