Tighter monetary policies globally, focused on bringing stubborn inflation in line with central bank targets, have increased the odds of a recession. That said, we believe economic elements are in place to sustain the late expansion phase of the credit cycle. Though the market may experience weak profit growth going into 2023, corporate and consumer fundamentals are currently healthy, giving them a favorable footing if the economy shifts. Valuations point to potential opportunities in risk assets—albeit in a volatile environment.
Our take on macro drivers and major asset classes at a glance.
We believe significant downside pressure on fixed income and equity markets is likely to subside.
Macro risks skew to the downside, with most major economies entrenched in the late expansion phase of the credit cycle.
Near term, strong bottom-up fundamentals should help keep credit spreads from further significant widening. We project below-average downgrade and default risk during the next 12 months.
We foresee higher long-term yields and central bank policy rates. We favor remaining underweight duration during the early innings of major central bank tightening cycles.
Tighter US monetary policy continues to support the dollar as global growth concerns mount. Until global growth begins to improve, perhaps led by China, we may not see foreign currencies consistently outperform the US dollar.
Solid bottom-up fundamentals may offer valuation support, but valuations are unlikely to expand until rates stop rising.
It is difficult to build an upside case until inflation retreats and the Fed pivots. We believe bottom-up corporate fundamentals need to hold up to support valuations.
We favor taking advantage of credit and equity market dislocations where valuations have cheapened and sentiment is overly bearish.
Risk markets appear to be pricing in a significant economic slowdown—not recession.
Stubborn inflation has forced central banks to hike rates despite weakening economic data.
Spreads may not tighten substantially from here, but we expect carry to persist relative to US Treasurys.
We wouldn't look for a repeat of the year-to-date spike in yields
Broadly, we believe FX is unlikely to outperform the US dollar in a risk-averse environment.
Until inflation trends lower, a lasting equity market bottom and steady uptrend are unlikely.
Excessive inflation has been driving central banks to tighten despite recession concerns.
VP, Senior Macro
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