Schroders turns neutral on global equities whilst remaining positive on duration and European credit
As major central banks marched on with tighter monetary policy, inflationary and recessionary risks continue to linger and add pressure for the global economy. Schroders revealed its investment convictions for the months to come at a press conference in Hong Kong today. The session highlighted growth and income opportunities covering global asset classes and investment themes for investors in Asia.
Many investors may agree that it is rather difficult to catch a trend as they navigate the investment markets in 2023. While it is still Schroders’ belief that the global economy will slow and then enter recession as we move into 2024, the firm acknowledges that the timing is now later than previously expected.
A transition to an investment environment of lower inflation and benchmark interest rates starting from 2023 will provide a more optimal platform for generating higher returns whilst managing risks, Schroders forecasts.
Keiko Kondo, Head of Multi-Asset Investments, Asia, said: “Despite ongoing signs of weakness in the US manufacturing and goods sector, the resilience in household spending and strength in the services industries have outweighed the impact. As a result, global equity markets broke out of their range and rate markets fully reversed any expectation of a Fed pivot. Risks to the global macro economy have become more evenly balanced. However, a higher unemployment rate remains a significant hurdle in the case of a prospective economic slowdown.”
“In Asia, there have been limited sign of inflation in China so far, reflecting slower-than-expected economic recovery, and this compares with inflation pressures in other Asian economies that are higher but moderating, following a similar path as those in other regions,” Kondo added.
Owing to the absence of an imminent move into global economic slowdown, Schroders now sees less short-term risk to corporate earnings and has turned neutral on equities.
“Earnings expectations for 2024 remain under pressure but a postponed recession implies a delay to a significant fall in earnings. We continue to harbour concerns about Asian equities, predicated on the weak global manufacturing cycle and relatively higher reliance on exports in particular markets such as South Korea and Taiwan. However, with recession temporarily postponed, there is a window of opportunity for the asset class to catch up in the medium to long term,” said Kondo.
Closer to home, Keiko Kondo eyes investment opportunities in China as the market continues to ride on waves of structural forces supported by government policies.
“Besides the services industries, investors may tap into the potential from sustainability and advanced technology-related sectors, with the likes of electric vehicles, renewable energy and semiconductors likely to benefit,” she added.
In the case of bonds, Kondo sees increasing roles that duration can play in investment portfolios as signs of strain in the US banking sector, falling inflation and peaking labour market conditions should allow the Fed to step back from tightening in the second half of 2023.
“Current dynamics in the rate curve limit the prospects for US Treasuries. Holding government bonds, particularly local emerging market ones, and selecting high quality credit bonds can help mitigate portfolio risk,” she said.
Kondo is also positive on the outlook for East Asian and Southeast Asian bonds as many of these markets are in the later stages of their rate hike cycles compared to the West.
Meanwhile, Schroders is neutral on overall credit spreads with valuations being fair. However, she sees value in European investment-grade credit as a means to retain exposure to duration with better carry dynamics.
Overall, Keiko Kondo concluded: “As investors recalibrates the signals from the current investment landscape, we expect a return to a more ‘normal’ interest rate and policy environment beyond 2023. More cyclical market volatility and higher dispersion across regions will favour an active approach to asset allocation more than ever.”
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