Don’t add risk amid macro uncertainty

“Headwinds to economic growth remain and hence without increasing their risk, investors should explore alternative ways to participate in the rally: for instance through derivatives”, points out ins this article Francesco Sandrini, Head of Multi-Asset Strategies, and John O’Toole, Head of Multi-Asset Investment Solutions from Amundi. 

Decelerating inflation, coupled with central banks’ less hawkish stances, is misleading the markets into believing that rising prices will come under control soon. At the same time, financing conditions and lending standards for consumers and corporates in the real economy are tightening and this could affect consumption. This may result in further deterioration in earnings dynamics in the context of expensive valuations. We remain defensive but exploit opportunities to use derivatives to seek to participate in potential upside without adding risk. Investors should also enhance protection and diversification through FX, commodities, and gold. 

High-conviction ideas. We are cautious about developed market equities (US, Eurozone, Japan). We also observe that changing market volatility could reveal ideas and allow investors to benefit from tactical market movements. In addition, we continue to see relative value opportunities favoring US small caps over expensive large caps but are assessing how slowing rate hikes could affect this view. In EM equities, we maintain our positive view of China on the back of an improving growth outlook and cheap relative valuations. As far as flows and investor positioning are concerned, China still has room to recover capital flows, given that a lot of money moved away from the country last year. 

In fixed income, we keep a positive view of US duration, given the decelerating pace of rate hikes by the Fed and weak growth prospects. But we are active and are monitoring labor markets in terms of job creation and the narrative that the Fed may have to keep rates higher for longer. Elsewhere, we look for opportunities across the globe. For instance, in Japan, we keep our cautious stance on government bonds but see the potential for the 2Y-10Y curve to steepen in Canada. In Europe, we are positive on 10Y BTP-Bund spreads, which have been resilient to repricing of terminal rates following the ECB’s hawkish views. China’s economic reopening and a decline in energy prices should help the Italian economy, supporting public finances and BTPs. In corporate credit, we stay cautious on EU HY as we believe the credit rally has gone too far and is not in line with our risk scenario. Further, the large amount of supply, though well received by the market, needs to be digested and we are already seeing profit-taking in some segments. Looking ahead, we expect credit flows to be less supportive of spreads. 

The FX pillar allows us to play our tactical as well as long-term views. Lower energy prices would mitigate the effects of the cost-of-living crisis in Europe, aiding near-term growth. This makes us positive on the EUR vs the GBP. We have a positive stance on the JPY vs the EUR as the yen could benefit from still-weak global growth. We also stay positive on the NOK/CAD for valuation reasons. In EM, we are now constructive on the ZAR/USD. The rand offers an attractive risk/return profile, and we believe the political uncertainty embedded in the FX is excessive. 

Risks and hedging. Diversification and portfolio protection remain two of our key objectives and we continue to use commodities (oil, gold) and financial derivatives to achieve that. We think structural imbalances, China reopening, and geopolitical risks (Iran tensions a major risk) could provide a fillip to oil. We also think investors should keep hedges in HY credit and strengthen protection on US equities.

Source: Amundi. The table represents a cross-asset assessment on a three- to six-month horizon based on views expressed at the most recent global investment committee. The outlook, changes in outlook, and opinions on the asset class assessment reflect the expected direction (+/-) and the strength of the conviction (+/++/+++). This assessment is subject to change and includes the effects of hedging components. FX = foreign exchange, IG = investment grade, HY = high yield, CBs = central banks, and BTP = Italian government bonds.