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Investment expertise

Monthly Investment Outlook

Monthly Investment Outlook

We publish a Monthly Investment Outlook that highlights our convictions on equities and bonds, as well as recent asset allocation changes.


Summary

  • MONTHLY INVESTMENT OUTLOOK - Focusing on carry strategies
  • GLOBAL TACTICAL ASSET ALLOCATION - Stay cautious on equities
  • UBP ECONOMIC OUTLOOK - Developed countries on the glide path to recession
  • UBP ECONOMIC OUTLOOK - China: a gradual reopening process in the months ahead
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  • GLOBAL BONDS - Attractive carry strategy
  • GLOBAL EQUITIES - Corporate margins set to decline meaningfully
  • RECENT CHANGES - Pivoting from equities to short duration high yield bonds and cocos

  • Stock and bond markets rallied into November on the back of speculation that the Fed might step back from its rapid pace of rate hikes and, more importantly, that it may reach its ‘terminal’ Fed Funds policy rate by early-2023.
  • While encouraging that the Fed slowed the pace of rate hikes, inflation fighting will push ‘terminal’ rates higher and longer than currently priced by the markets.
  • With the peak of inflation in sight in the US but not in Europe, a peak in the US dollar is likely entering 2023. As a result, we closed our long-standing overweight USD positions in favour of a neutral position going into year-end.
  • A 2023 economic downturn poses the greatest risk for US equities with the recent rally leaving valuations at 18x earnings, levels only seen in post-recession recoveries (1991, 2003 and 2009), policy pauses following exogenous shocks (2017 and 2019) or preludes to the equity bubbles of 1999-2000 and 2020-21.
  • Outside of bubble periods, equity returns from such valuation levels have historically been disproportionately driven by earnings growth with valuations typically flat to declining in the following 6-12 month period. As the S&P 500 earnings trajectory resembles the earnings trends in the early stages of the 1990 and 2001 recessions, the current elevated level of valuations and falling earnings expectations present headwinds to equity returns in 2023.
  • As a result, we are increasingly focused on strategies that deliver income/carry for portfolios in place of directional equity exposure. Strong bank balance sheets allow the attractive carry in CoCo’s to more than offset our expectation of a cyclical rise in default rates in 2023.
  • Short duration high yield looks poised to offer a similar cushion even though spread widening is likely moving through the new year.
  • In the alternatives space, an opportunity exists to rotate some equity long-short positions into expanded credit long-short holdings. We expect credit long-short to benefit from the high absolute carry, elevated fixed income volatility and increased single credit dispersion as the US economy moves into recession, potentially offering premiums to the modest equity return outlook for 1H2023.
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