April 2023 – As asset allocators, we are used to the market’s occasional reminder that it is more than ready to teach humility to any over-confident, prediction-laden investors. So, it is with a healthy lack of certainty that we confront the range of plausible routes down which the global economy and markets may now travel. Observing market price behaviour is a key starting point.
In the context of such a recent sharp reappraisal of the policy-rate path, it is interesting to note that the overall equity market continues to be relatively well behaved (substantially supported in the US by large cap tech which may be perceived as being somewhat ahead of the game). Furthermore, an almost too-composed response to events by financial markets at large is illustrated by our investor ‘narrative monitor’, which is showing no meaningful change in the level of stated concerns about recession (or inflation) in market news media, despite what can reasonably be considered a meaningful upset.
As we have seen in the past few weeks, with the European Central Bank (ECB) hiking 50 bps and the Fed hiking 25 bps, central banks remain primarily focused on inflation-fighting. In this regard, it will be important to assess signals from the credit channel that the banking crisis may indeed be ‘helping’.
The strong move in bonds, with long-term treasuries rallying from 4.0% to about 3.6%, delivering a capital gain of more than 5.0% over a matter of days, has led us to tactically scale-back our duration exposure, taking profit from such an outsized price move.
More strategically, we continue to see enhanced return and diversification opportunities across the fixed income space – as demonstrated by the renewed decorrelation seen across asset classes in recent weeks. We maintain a preference for the long end of the Treasuries curve (though much reduced from the fourth quarter of 2022) and we also like selected emerging market sovereigns and currencies, such as Brazil and Mexico. Within credit, we have been taking advantage of some interesting opportunities in terms of both spread and outright duration exposure in areas of European Investment Grade credit across our Sustainable and Income strategies. For our broader Multi Asset range, we maintain a relatively neutral stance on credit overall. Elsewhere, our equity exposure is neutral to underweight, and we have a relative preference for non-US markets. Having responded to market volatility in the fourth quarter, we have generally been moving to more neutral positions in our strategies, with scope to add risk should ‘episodes’ of volatility present opportunities.