Nanette Abuhoff Jacobson, Global Investment and Multi-Asset Strategist
Supriya Menon, Multi-Asset Strategist
Alex King, CFA, Investment Strategy AnalystThe views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Key points
- Expect bumpy conditions as central banks continue to fight inflation and slow growth. We see another leg down for corporate earnings and multiples, leaving us preferring a moderate underweight to global equities versus defensive fixed income.
- Within equities, we think fundamentals favor Japan over the US and Europe, while China may have hit bottom. Given significant policy intervention in China and the expected relaxation of zero-COVID restrictions, we’ve raised our views to moderately overweight on China and neutral on emerging markets.
- Within fixed income, we have an underweight view on spreads and a neutral view on duration. Spreads have tightened to unattractive levels given risks in the credit market, so we have an underweight view on growth fixed income. Within defensive fixed income, we are still relatively bearish on European rates versus US rates.
- We maintain our moderately overweight view on commodities — and particularly copper, given lean inventories and China’s reopening.
- Downside risks to our views include a severe recession in the US or Europe and a liquidity-induced accident. Upside risks include a soft-landing scenario — where the Fed tightens policy just enough — and a decisive uptick in China’s fundamentals.
From a macro and market standpoint, the worst may be behind us, but we think it’s too early to wave the all-clear flag for risk in 2023. Tight financial conditions will be a headwind for most developed economies as central banks fight to bring inflation down, and we expect recessions in the US and Europe, though the severity is an open question. As suggested by the sharp rally in the fourth quarter of 2022, however, markets appear to be skipping the recession chapter of the story and moving straight to rate cuts and the benefits to risk assets. But even mild recessions mean negative earnings growth and pressure on equities and credit spreads.
Our outlook is a bit brighter when it comes to China and other emerging markets (EM). While we acknowledge the very real health risks that come with relaxing zero-COVID policies, we believe this shift will eventually unleash tremendous pent-up consumer demand for services, just as we’ve seen in other regions, and that there will be positive spillover effects for the rest of emerging Asia and exporting countries in Latin America.
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