March again saw realised inflation outpace expectations leading to a pricing of more hawkish central bank monetary policy. Although we expect rising rates to challenge equity returns, the asset class should still outperform fixed income. Our preference for equity exposure is in markets with attractive valuations and supportive monetary/fiscal policy, namely, China and Japan.
While valuations in equity markets seesaw on news reports, expectations for the level of central bank policy rates continue to ratchet higher as inflation repeatedly outpaces expectations. In contrast to the start of the year, however, the corresponding rise in real yields has not led to an equity market sell-off. Our concern is that ultimately, the focus will return to the prospect of higher discount rates.
In March we increased our underweight in US duration as central banks clearly signalled their primary concern is well-above-target inflation rather than GDP growth possibly slowing due to the Ukraine war. We also altered our regional equity exposures mix. The fact that GDP growth prior to the conflict’s outbreak was well above trend provides some cushion.
Though rising rates will challenge equity returns, the asset class should still outperform fixed income. We prefer to take our equity exposure in markets with attractive valuations and supportive monetary/fiscal policy, namely, China and Japan.
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