Investment Monthly May 2023
Key takeaways:
- We advocate for a defensive asset allocation ahead of what looks set to be a choppy 6 to 12 months for markets. Noisy economic data and reactive monetary policy will create an environment conducive to market volatility
- Short-duration fixed income is preferred amid still negative term premia, and we also favour high-quality credits given the favourable income opportunities on offer
- EM asset classes are attractive given lower valuations, a better macro outlook vs DMs, and the prospect of Fed cuts. Within the EM complex, we prefer Asian assets, with a particular preference on North Asia
Macro Outlook
- Macroeconomic data has held up better than feared but recession is the most probable outcome, particularly as we head into late 2023. Banking sector challenges add to pre-existing headwinds, especially in the West
- Inflation is rolling over and although still tight, there are early signs that labour markets are cooling. The non-housing services side of inflation remains a sticking point, but we anticipate these disinflationary trends to continue
- Stronger growth dynamics and a less persistent inflation mix leaves Asia in a ‘parallel world’. Trade may come under pressure from weaker external demand, but China’s re-opening looks set to spur a cyclical recovery
Policy Outlook
- Sticky core inflation, coupled with central bankers’ inflation concerns, mean a small amount of further rate tightening could be likely. However, we think Fed policy rates then ease at the turn of the year as recessions bite
- Fiscal policy will continue to act as a drag, but we are unlikely to see levels of austerity like we did back in the 2010s. This may also help moderate the severity of a recession
- In China, both fiscal and monetary policy are set to remain accommodative although scope for major new stimulus may be unlikely. In Japan, a measured normalisation of the BoJ’s yield curve control framework looks probable