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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.
There is a sense that the world is slowly “getting back to normal,” after more than a year of COVID-induced economic lockdowns and other restrictions. Unfortunately, many countries — and even some parts of the US — are still grappling with more contagious and virulent strains of the virus (e.g., the so-called “Delta variant”) and troublingly low COVID vaccination rates. We are not out of the woods yet. But broadly speaking, the global economy has been recovering with the aid of accommodative fiscal and monetary policy, supporting the strong performance of risk assets and the ongoing rotation from growth- to value-oriented exposures.
The threat of rising inflation is a bogeyman now. Amid supply/demand imbalances in labor and other factors, we believe inflationary pressures are likely to persist in the period ahead. Against this backdrop, our investment outlook remains largely pro-risk, but is tempered to some degree by what we see as a worsening growth/inflation trade-off. Here are a few thoughts on how investors might navigate this mixed picture.
In our view, the specter of higher inflation and interest rates favors the potential outperformance of value-style equity exposures going forward (Figure 1), including smaller-cap stocks and more cyclical market sectors such as financials, consumer discretionary, materials, and industrials. From a geographic standpoint, we generally prefer non-US equity markets, particularly Europe, which we believe is on the cusp of an economic upturn. We are moderately bullish on emerging markets, given their leverage to an accelerating global cycle, elevated commodity prices, and continued US-dollar weakness.
We are moderately bearish on government debt, especially in Europe, where negative interest rates look vulnerable to the improving global cycle. However, it still makes sense for many investors to retain an allocation to high-quality bonds in the event of a sharp equity sell-off. In addition, a global fixed income universe gives investors numerous opportunities to potentially add value to their portfolios. We also think municipal bonds can play a key role for many taxable investors, while option strategies can help supplement certain bond exposures.
Most credit spreads appear rather rich (read: expensive) as of this writing, but we don’t see a likely catalyst for them to widen meaningfully from here. In our judgment, some of the most compelling risk/reward opportunities in today’s credit markets can be found in often-overlooked sectors like bank loans, collateralized loan obligations (CLOs), and residential-housing-oriented structured credit. We also believe select emerging markets sovereign and local debt may offer attractive upside potential from both a spread and a currency perspective.
Inflation could reach higher levels and/or last longer than many observers and investors currently expect. If we are right, commodities may benefit from this trend, which is why we are moderately bullish on the asset class as a whole. While value-oriented equities may provide some inflation protection, commodities (excluding precious metals) have historically been the most inflation-sensitive asset class. For example, energy and industrial metals may help investors hedge their portfolios against rising inflation and interest rates.
China internet: Identifying opportunities amid economic reopening
China’s re-opening and economic recovery from its zero-COVID policy has bolstered our optimism in Chinese internet companies.
Navigating the new global economy in 2023
This executive summary distills the points of view of several of our 2023 Outlook authors. Discover the risks and opportunities they see as we enter a new economic and market regime.
China’s economy: Poised to exceed expectations in 2023
With the bar set so low for China's economy, Macro Strategist Santiago Millan thinks it won't take much for an upside surprise in 2023.
Why Europe could surprise in 2023
Eoin O’Callaghan and John Butler discuss the contrasting prospects of the Euro Area and the UK and why 2023 could bring positive surprises in the region.
2023: The year of disinflation for the US economy
In the coming year, US Macro Strategist Juhi Dhawan expects to see inflation begin to decline, the economy adjust to higher interest rates, and labor markets feel the pain of restrictive Fed policy.
Inflation, rates, and volatility: The best defense is a good offense
Insurance Strategist Tim Antonelli shares his latest multi-asset views for insurers, including the need to balance defensive portfolio strategies with continued income and return generation.
2023 Macro and rates outlook: Goodbye easy money, hello regime change
Macro Strategist John Butler highlights the impact of macroeconomic "regime change" on global inflation and interest rates, with potential implications for investors.
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All figures are for the Wellington Management Group of companies as at 30th June 2022.
Past performance is no guarantee of future performance and can be misleading. Funds returns are shown net of fees.
Source: Wellington Management
Investment in the funds described on this website carries a substantial degree of risk and places an investor’s capital at risk. The price and value of investments is not guaranteed and can go down as well as up. An investor may not get back the original amount invested and an investor may lose all of their investment. Investment in the funds described on this website is not suitable for all investors. If an investor is in any doubt as to the suitability of an investment in a fund, an investor should consult an independent financial advisor. The information on this website does not constitute, and should not be construed as, investment advice or a recommendation to buy, sell or otherwise transact in any security including, but not limited to, shares in the funds. An investor should only invest in a fund once that investor has carefully read and understood the offering documents for the relevant fund, which are the relevant prospectus, and Key Investor Information which contain further information on the risks and features of the fund, and the latest financial reports and any other offering documents for the fund which are available on this Website. Unless stated otherwise data is as at previous month end.