Underscoring the still high market volatility, fixed income premia moved notably higher over October, led by real yields. Overall, we remain neutral on government bonds, but have deepened our long positions in European investment-grade credit.
Equity investors have eagerly awaited the third-quarter earnings reports. We believe there is still room for earnings expectations to fall in Europe, but in the US, they have already fallen a long way, especially for tech names.
With the economic outlook now darkening and Japanese companies operationally highly levered to the global cycle, we have cut Japanese equities to neutral, with both valuation and fundamental support.
Fed funds rate expectations having peaked, valuations of US growth stocks should now be driven primarily by earnings. As the US economy moves closer to recession, the superior earnings growth from the growth style should result in relatively greater performance.
Commodities remain in our ‘favour’ bucket. The key supports are all still in place, recession concerns notwithstanding. They include strategic developments such as the sustainable (energy) transition that are commodity-intensive; geopolitics and resource nationalism; scarce supply; asset allocation/diversification benefits; and the Chinese economy reopening, constraining base metal supplies.
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