Money/Credit/Debt

Investors overestimate the threat current interest rate levels pose to both equities and the economy. Despite a rising long end, the gap between high-yield borrowing costs and both nominal growth and corporate profits is at five-year lows and falling. Remain overweight equities. Within Fixed Income, Upgrade High Yield and Downgrade Government Bonds and EM Debt. Downgrade Chinese Equities to Neutral.

South Africa’s ambitious reform agenda will take time to bear fruit. Meanwhile, the country faces a stagflationary squeeze as inflation rises while growth slows. South African stocks, bonds, and currency are all vulnerable.

The Turkish financial markets will struggle in the very near term, but beyond that, the cyclical disinflation process will resume. Fixed-income investors should put Turkish 2-year local currencybonds on a ‘buy’ watch list.

The turmoil in private credit is a wild card, but our traditional suite of credit cycle indicators does not point to an imminent spread-widening episode. We reiterate our benchmark weightings on Treasuries, investment-grade and high-yield corporate bonds.

Indian stocks have further downside in absolute terms as profits disappoint. Their underperformance versus the EM equity benchmark, however, is late, which warrants a shift from underweight to neutral allocation.

Precious metals, corporate credit, and tech stocks are all showing signs of late-cycle euphoria. We identify various trigger points that investors should monitor to turn more bearish.