Resilient growth, higher rates, a more balanced risk outlook
For much of the year, investors have been waiting for higher interest rates, geopolitical tensions and the energy shock to seriously damage economic activity. So far, that has not happened, with solid growth in the US and Europe. That resilience has changed the interest rates story.
Inflation has not fallen quickly enough and central banks are now raising rates because the economy has proved strong enough to absorb them. Going forward, energy prices will be the key factor that will determine if resilient growth can continue with somewhat higher rates or if we enter into a much longer rate hiking cycle.
If energy prices rise significantly again, much higher interest rates will make growth eventually slow.
What are the implications for asset allocation? First the environment is fundamentally still supportive for equities, with earnings remaining strong. We favour technology and energy sectors.
On fixed income, very hawkish central banks monetary policies have now been priced in and yields curve have moved upwards. We have gradually reduced our underweight in sovereign bonds, by buying first short duration bonds in mid-September, then, we reduced further by buying in the 5-7 buckets, at attractive yields levels.
Overall, we remain constructive, but we don’t think this is the moment to become more aggressive in our asset allocation
