Stabilization might be enough
Preview
The themes we discuss at our Annual Investment Symposium guide our research process. Over a longer-term horizon, we believe global stocks have greater performance potential than global bonds, despite slightly slower growth expectations. With interest rates starting from elevated levels, overall return expectations from all fixed income assets have become more attractive than has been the case in recent years.
We need to recognize that our longer-term outlook will not be reached along a smooth path but take encouragement from the improved momentum in stock prices. Growth stabilization and declining inflation may be enough to justify the elevated valuations of equities.
In this Allocation Views, we continue to look at the major themes which are driving our views as well as considering where investors can find opportunities.
Key takeaways
Growth is stabilizing: Recession risks are moderating for some developed economies, and the outlook is stabilizing. Lagged effects of monetary policy and tight lending standards remain a risk to economic activity. We expect the disparity between manufacturing and services growth to narrow.
Inflation risks are now more balanced: Inflation is still well above target levels, but goods deflation remains in place, and core inflation is moderating across developed markets. Sticky services inflation is expected to be balanced by demand destruction as the lagged effects of slower economic growth are felt.
Policy to remain restrictive: Central banks are likely at peak rates, and are more data dependent, but will likely continue to sustain restrictive conditions. They maintain a primary focus on inflation, and most are accepting the consequences to growth. Policymakers remain prepared to address evolving crises and maintain financial stability.
Nimble management still required: The level of premium discounted in risk assets does not appear overly generous, but the declining level of uncertainty that we foresee makes this less of an impediment to owning such assets. We maintain our nimble investment management style and have increased our conviction toward equities.
Bond yields have declined recently: Our longer-term analysis shows that the return potential from global bonds, especially lower-risk government bonds, has improved. This supports our preference for longer duration assets, which has been maintained in recent months despite the sharp decline in yields more recently.
Opportunities in alternative assets: Maintaining a diversified portfolio of risk premia, in addition to the traditional benefits of a balanced portfolio between stocks and bonds, is the most likely path toward stable potential returns, in our view. We are attracted to naturally diversifying “alternatives” such as private assets, which offer the potential to earn an incremental return linked to their relative illiquidity.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
The allocation of assets among different strategies, asset classes and investments may not prove beneficial or produce the desired results.
To the extent a strategy invests in companies in a specific country or region, it may experience greater volatility than a strategy that is more broadly diversified geographically.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
Active management does not ensure gains or protect against market declines.
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The views expressed are those of the investment manager and the comments, opinions and analyses are rendered as at publication date and may change without notice. The underlying assumptions and these views are subject to change based on market and other conditions and may differ from other portfolio managers or of the firm as a whole. The information provided in this material is not intended as a complete analysis of every material fact regarding any country, region or market. There is no assurance that any prediction, projection or forecast on the economy, stock market, bond market or the economic trends of the markets will be realized. The value of investments and the income from them can go down as well as up and you may not get back the full amount that you invested. Past performance is not necessarily indicative nor a guarantee of future performance. All investments involve risks, including possible loss of principal.
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