Altaf Kassam discusses the dynamic macroeconomic and markets events that have unfolded in recent months and explores the relevant question now is what comes next?
Speaker : Altaf Kassam
For this year's Mid-Year Global Market Outlook we have tried to look at what has changed over the last few months and a lot has happened. And it is fair to say we have got a lot more gloomy on the economy. And, apart from disinflation, nothing really gets much better from here. So, where are the opportunities? What should investors be doing? Well, to start with, fixed income is in a better place than we have seen for the last five years.
And the opportunities in fixed income are really at the short end where yield per unit of duration or return per unit of risk look the most attractive. In risk assets, for equities, it is hard to see the US equity market continuing its sharp rally and we still favor Europe away from the US because of better valuations. And, within the US, we definitely think you should be looking at quality more than any other characteristic in the equity market.
For emerging markets, a lot depends on China, and although we are optimistic right now, we would rather stay on the sidelines until we are more confident in its economic growth. And then, finally, for equity investors who need that extra return but don't want to take all the risk, we think downside protection is a strategy that you should be looking at all the time. So, for us, you can use options, you can use manage volatility or defensive equities, or you can use asset allocation to lower the risk of your equity portfolio.
So it is going to be a tough few months. The macro environment isn't improving quickly. Disinflation is a force but will only take you so far. So, when you look at fixed income, stay at the short end. When you look at risk assets, focus on quality and look outside the US. And the decline of the US dollar we think is still happening, but it is going to be bumpy.
In the end, it will prove a tailwind for emerging market equities, but maybe not quite now. With that, thank you very much!
Altaf Kassam, EMEA Head of Investment Strategy & Research
Heightened liquidity risk and softening growth prospects demand vigilance from investors. Persistent uncertainty and recession risks warrant cautious portfolio positioning.
Yield-Per-Unit-Duration Spikes for Short-Dated Corporates
Even if the Fed is closer to the end of this current hike cycle, its actions so far have created above-average income opportunities within short duration exposures – the most sensitive to Fed policy.
Source: Bloomberg Finance L.P. as of 4/5/2023. Past performance is not a reliable indicator of future performance. US 1-3 Year Corp = Bloomberg US 1-3 Year Corporate Bond Index; US 5-10 Year Corp = Bloomberg US 5-10 Year Corporate Bond Index; US 10+ Corp = Bloomberg US 10+ Year Corporate Bond Index; Broad US Corp = Bloomberg US Corporate Bond Index; US Agg = Bloomberg US Aggregate Bond Index.
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