Is bad news for the economy actually good news for markets?

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. For professional, institutional, or accredited investors only. 

By: Nanetta Abuhoff Jacobson, Global Investment and Multi-Asset Strategist, Supriya Menon, Head of Multi-Asset Strategy – EMEA, Alex King, CFA, Investment Strategy Analyst

Key points

• The global economy remains resilient, but after a longer lag than in previous cycles, higher interest rates are beginning to bite, with signs of cooling in the labor and housing markets. We continue to favor defensive fixed income over equities and growth fixed income. 
• We maintain a moderately overweight stance in government bonds globally, as “higher for longer” rates slow growth. We think Japan’s real yields stand out as the most negative while weaker growth in Europe and high real yields in the US present better relative value. We are less negative on credit spreads, as there is a growing chance that income could dominate returns in the short term, but valuations still provide little cushion for a rise in defaults.
• Japan remains our top developed equity market, as the economy is benefiting from higher inflation. We have reduced our China view to neutral. Some economic green shoots are emerging and equity valuations are quite low, but the property market and geopolitics are headwinds. 
• We expect inflation to remain sticky and settle higher than in past decades. Thus, we remain positive on commodities. Copper demand for electrification is likely to far outstrip supply, and we expect gold to be an effective stagflation hedge. 
• Downside risks to our views include a hard landing, US political turmoil, a bank or property crisis in China, and an escalation in the Ukraine war or US/China tensions. Upside risks include a “Goldilocks” scenario in the US where the Fed tightens policy sufficiently to quell inflation while growth remains close to trend. 

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