Markets have shown good levels of resilience since the start of the year; this also considering the persistency of several factors, including geopolitical tensions and persistent inflation, that have severely weighted on performance in 2022. Nevertheless, the growth outlook for the rest of the year remains uncertain.
We have seen three main themes of late. First, the US economy held up well, on the back of strong investments and consumption. But China, on track for lower long-term growth, is showing signs of weakness in its near-term trajectory. Thirdly, the policy divergence between central banks in emerging markets (EM) and developed markets (DM) is becoming more visible after the recent rate cuts in Latin America. This backdrop calls for a cautious, diversified stance with all portfolio hedges in place. However, investors should aim to benefit from the EM growth advantage and policy divergences through EM equities and debt.
We believe that bonds are back on the scene and could represent an opportunity for investors, as we expect them to recover over 2023. The focus should be on high-quality credit at a global level, an active duration stance and currency management, as both monetary and fiscal policies in developed and emerging markets are expected diverge during the year. Investors should be careful and pay attention to liquidity risk and corporate leverage2. We do expect markets to continue looking at inflation numbers and the Fed’s reaction, with a possible pivot by the end of Q1 with “terminal rate” at 5.25%, but attention could soon shift towards growth and recession fears3.
We believe that equities can provide appealing entry points, but an overall cautious stance in developed markets equities should be maintained. On the other hand, investors should consider looking for divergences and benefit from rotations with a strong bottom-up focus. In general, we favour a combination of quality-value stocks and like high dividend names. US equities have been driven by downward movements in core yields recently, rather than any significant improvement in corporate fundamentals4. In Europe, while we see higher risks of stagflation, any decline in energy prices should support the overall consumption environment. We stay active in assessing the evolving economic environment and resulting investment implications.
The 60-40 reloaded with an inflation tilt and focus on income
Markets are experiencing an environment of relatively high inflation and higher interest rates, not witnessed in the past 40 years5. As the macroeconomic conditions are still uncertain, we believe that a new “60-40 reloaded” portfolio allocation that prioritises real returns, takes into account inflation and focuses on income solutions may help investors meet their objectives.
Annual double-digit losses in a 60% Equity – 40% Bonds US allocation have been very rare (less than 4% of the time since 1976)6. On such occasions, the portfolio usually bounces back the following year, recording strong performance (almost 15% on average) above the long-term average of 10% annualised returns for the portfolio. However, there is a need to stay active across asset classes.
Environmental, Social and Governance (ESG) investing has received considerable attention from investors in recent years. A good way to embrace an integrated ESG approach, in our view, is using a forward-looking approach to select two types of companies, ESG winners and ESG improvers.
Furthermore, we believe that other solutions focusing on food security, tackling climate change and socially-oriented strategies could provide opportunities in the increasingly crowded ESG space. Lastly, as Europe grapples with an energy crisis, we think progress on ESG investing is likely to continue as governments seek to reduce their reliance on carbon-intensive fuels.7
Among the main innovations introduced by ESG investing, we believe that Net Zero could provide opportunities for investors seeking to generate a dual impact on their investments, that is providing financial returns as well as contributing to the wellbeing of the planet. Indeed, we believe in the possibility of unlocking value by investing not only in companies well advanced in their self-decarbonisation path, but also in businesses in need of improvement but with the potential of making the change where this potential is not well-appreciated by the markets.
1 Source: Amundi Institute, as of January 2023 2 Source: Amundi, 2023 Investment Outlook - Some light for investors after the storm, 21 November 2022 3 Source: Amundi, Global Investment Views, January 2023 4 Source: Amundi, Global Investment Views, January 2023 5 Source: Amundi, as of November 2022 6 Source: Amundi Institute, as of January 2023 7 Source: Amundi, Global Investment Views, January 2023
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