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What a difference a few weeks can make in the equity market! The sharp, swift sell-off through the first month of this year is raising some difficult questions for investors, chiefly: Are we just witnessing a long-overdue short-term correction in the more speculative areas of the market, or perhaps something more fundamental (and enduring) that could portend a broader unwinding of equity risk?
My take: I suspect the market is in fact in the midst of recalibrating to a new environment where liquidity is going to be tighter, real interest rates higher, and corporate profits a bigger driver of share prices. As my colleague Trevor Noren suggests in his latest blog post, Value versus growth: Expect volatility more than a smooth transition of leadership, this potential “regime change” is likely to show up in sporadic and sometimes violent reversals of the multi-year outperformance of momentum and growth equity factors.
In that vein, I expect the nascent rotation from growth stocks to their value-oriented counterparts (Figure 1) to continue and think now may be an opportune time for investors to consider upgrading their equity portfolios to higher-quality companies that have taken significant market hits but are growing their revenues and profits.
Expect higher market volatility: After a period of plentiful fiscal and monetary liquidity due to the pandemic, the specter of less liquidity going forward may continue to weigh on markets, especially stocks of companies that have relied on liquidity rather than earnings for multiple expansion.
Think about upgrading your equity portfolio: With this month’s market sell-off, many investors are finding opportunities in higher-quality companies with growing revenues and profits at potentially attractive entry points.
Diversify your equity exposure: Investor portfolios appear to be still biased toward growth equities, as the market share in large-cap growth mutual funds is currently around twice that of value funds (according to Morningstar). Asset allocators should consider shifting some of their growth exposure to value, where (as noted) I expect continued outperformance.
Respect the possibility of regime change: No one can know if “this time is different,” but given today’s backdrop of higher, “stickier” inflation, policy tightening, and geopolitical risks, I believe it is prudent to be prepared for that possibility and to favor real assets, value-oriented equities, commodities, floating-rate credit, and TIPS over US Treasuries.
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Investment Director Masahiko Loo explores the risks of Japan facing a UK-style pension crisis and identifies fundamental reasons that make Japanese pension funds inherently less vulnerable.
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Take a quick tour of the alternative investment environment with investors from across our macro research and hedge fund teams, as they explore the geopolitical landscape, macro volatility, and key trends like climate-change adaptation and digital tokenization.
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Recession risks and markets: Can we avoid a COVID hangover?
Current earnings forecasts and asset prices suggest overly optimistic expectations for the global economy and markets in 2023, according to Equity Portfolio Manager Dan Pozen.
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Fixed Income Portfolio Manager Konstantin Leidman discusses why European high-yield investors need to be ready for both further volatility and the emergence of new opportunities.
Multi-Asset Outlook — Higher rates for longer: What does it mean for markets?
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2023 Investment Outlook
As you consider your investment strategy for 2023, our Outlook collection provides you with unique perspectives across the macro environment and all major capital markets, drawing on our global marketplace of ideas more than 800 investors strong.
Emerging markets debt outlook: A glass half full or half empty?
Against a still-challenging global backdrop for emerging markets, Macro Strategist Gillian Edgeworth highlights opportunities created by extreme credit spread dispersion across individual countries.
High-yield bonds in 2023: Fortune favours the patient
Amid ongoing dislocation in the high-yield market, Fixed Income Portfolio Manager Konstantin Leidman sees opportunities for investors to take advantage of potentially attractive valuations.
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.