Risk assets have been resilient this year in the face of increased uncertainty, moving ahead despite stickier-than-expected inflation and deepening conflicts in the Middle East and Ukraine. Meanwhile, bond markets have struggled as inflation lingered, generating “higher for longer” concerns.
Yet, “we continue to see fixed income as a bright spot for investors given current yield levels, slowing growth, and continued disinflation,” said Michele Barlow, head of investment strategy and research, Asia Pacific at State Street Global Advisors (SSGA).
“Overall, bonds retain their place on centre stage with impressive yields, abating (slowly) inflation, and a strong but slowing economy that has convinced the Fed that the next rate move will be lower.
Barlow (pictured) said that a similar picture is unfolding outside the US (except Japan), providing opportunities for global fixed income investors.
She continues to favor extending duration with a focus on higher quality instruments such as US Treasuries, as well as some corporate and consumer credits.
On the other hand, she is cautious on risk assets and favours quality stocks in equity markets, Barlow told FSA, as she introduced SSGA’s midyear global market outlook.
“Our stance has not changed since the start of the year,” she said.
SSGA expects that disinflation will continue in the US and economic activity will be weaker this year relative to last year, and soft landing is still its base case scenario, with the Federal Reserve ready to cut interest rates this summer.
“We began the year with a subdued outlook for equities, but stock markets have maintained their incredible momentum. Record highs were reached in the US, Europe, and most notably, Japan amid resilient economic data and robust corporate earnings,” said Barlow.
However, SSGA believes “moderation is still warranted”, as the equity premium declines, valuations hit highs (especially in the US), and the possibility that shifting expectations around interest rates could temper enthusiasm.
Moreover, Barlow continues to believe emerging markets will remain vulnerable given the global landscape, although there are “pockets of opportunity within emerging market debt and select emerging market equities”, such as India and Taiwan
Although the “big picture” hasn’t changed, SSGA believes “many factors remain in flux and investors should focus on right-sizing their positions and getting portfolio implementation right.”
“The greatest risk to markets and the global economy is stagflation,” said Barlow.
