Asset Allocation
A benign disinflation will support equities over the next few quarters. Stocks will fall next year as a recession begins when investors least expect it.
In this report, we follow up on the upgrade to our US duration stance from last week with a review of our rates views and government bond allocations outside the US. We conclude that while we now find US Treasuries to be more attractive from a value perspective, even better value is available in euro area and UK government debt.
Once the debt ceiling soap opera ends, investors will likely turn their attention to some of the tailwinds supporting stocks. These include stronger earnings growth, diminished bank stresses, better housing data, early signs of an upleg in the manufacturing cycle, the prospects of an AI-driven productivity boom, and the fact that labor slack has managed to increase without rising unemployment. Investors should resist turning bearish on stocks for now but look to become more defensive later this year.
The Q1-2023 earnings season has surprised as companies’ results point to the end of the earnings recession. However, the good news is already priced in – the market has barely budged over the past six weeks. Earnings rebound may continue as long as the economy avoids a recession. However, inevitably, tighter monetary policy will weigh on demand, and recovery will come to a halt.
If the recession begins this year, it is unlikely to be mild, because inflation will not have fallen by enough to allow the Fed to cut rates aggressively. In contrast, if the recession starts in 2024 or later, when inflation is likely to be much lower, the Fed will be able to cushion the blow. Our base case remains a 2024 recession but the risks around that view have increased in light of recent banking stresses.
In Section I, we discuss why the rally in stock prices over the past month reflects the soft-landing view, and why that is not a likely economic outcome. US inflation is slowing, but target inflation remains elusive. Meanwhile, cracks in the US labor market are already apparent, and there is strong evidence against the view that US stocks are appropriately priced for an eventual US recession. This underscores that conservative investment positioning is still warranted. In Section II, we check in on the indebtedness risk of several major economies, and examine whether these risks exist primarily in the household, nonfinancial corporate, or government sectors. While there are limited cyclical implications of recent trends in global indebtedness, there are several problems that will eventually “come home to roost” – particularly in the US and China.
In this volume of BCA Crypto we compare gold against bitcoin. We begin by dispelling some common misconceptions that investors have about gold, and why, at its core, gold is driven more by belief than by intrinsic value. We then proceed to explain why gold still serves an important role in our economy and how it differs from fiat money. Later, we explain how bitcoin is different from other cryptocurrencies, and why it could rival gold as a reserve asset in the future. Finally, we discuss the outlook for bitcoin, as well as which macro factors investor should watch.
We see a more positive backdrop for credit providers, with bilateral and structuring features as tailwinds for Private Credit. While there may be potential green shoots in some areas of Private Equity, current valuations are not attractive. We prefer Directional Hedge Funds over Diversifier and Risk Mitigation strategies. Real Estate has been an effective hedge against inflation, but now historically low cap rates are a headwind.
The YTD market rally was driven by outperformance of high-quality growth stocks which offer protection in uncertain times. As growth continues to slow, high-quality growth stocks should continue to do well. Hence, we are moving to overweight Growth vs. Value.