We have been turning more cautious in multi-asset portfolios amid doubts over market forecasts of a ‘soft landing’ in the face of hawkish inflation-fighting central banks and rising bond yields. For us, this argues for being short duration in bonds. On equities, we have opted to be short Europe, but we are upbeat on Japan and China. We are long commodities.
For central banks, inflation has now been sticky enough for them to drop the ‘transitory’ label and start acting. At the same time, markets do not expect the US Federal Reserve, or the ECB, to tighten policy for long; the rate rising cycle is expected to reverse from 2023.
Bonds are generally not yet signalling recession, but equity prices more so. There is a ‘Covid-feel’ to markets: moves in yields and weakness in major equities are reminiscent of March 2020.
While credit spreads have widened, the liquidity premium on corporate bonds has risen relatively modestly. We ask whether current spreads can truly reward investors for a deterioration in credit risk as the circumstances become more challenging.
We believe investment-grade credit is valued particularly attractively in both the US and Europe. We see credit as a clear buy opportunity should our appetite for taking more risk grow.
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