As we look forward to the rest of 2023, key themes for markets remain centered on inflation, monetary policy, and recession risk. However, macro signals are mixed, with stock and bond markets pricing in different scenarios – the latter implying recession. In this environment, effective active investing is about finding the signal, through the noise. This task will be especially critical in the coming months, as we look for signs of financial market recession, as a precursor to an economic recession.
Many economies have demonstrated remarkable resilience this year, despite aggressive rate hikes and the removal of liquidity. Among the tailwinds are strong labor markets, China’s reopening, softening inflation and the Fed nearing an end to its hiking cycle. However, we’ve not felt the full effects of tightening yet. This paints a more bearish perspective heading towards year-end. Furthermore, inflation remains sticky and as such rates are likely to be ‘higher for longer’.
Bond yields have reset to their most attractive levels in decades. But, are bonds back? Investors need to be selective, but there are opportunities as the yield curve normalizes. With monetary policies likely to diverge, taking a global approach - with active duration and curve management, will be critical. We find value in areas such as high yield and emerging market debt. Adding quality duration could also act as a hedge, to a growth shock.
Equity markets have rallied year-to-date; however, it’s been a narrow rally. Generative AI momentum has picked up and is poised to reshape the investment landscape – but investors need to look beyond the hype. And while earnings have been resilient, estimates may be too high amid slowing growth. A focus on profitability and starting valuations will be important. We remain underweight stocks but are leaning into selective opportunities in small caps, emerging markets and Japan.
Market sentiment is likely to gyrate between bullish and bearish narratives. Staying active and diversified will be key, to finding signals amid the noise.
