Executive summary
- We maintain our view from Q3 2022 that the outlook for risk assets is negative, as the inflation fight by global central banks has intensified.
- We believe we are entering a world increasingly shaped by a ‘3G environment’ – marked by the (3G) forces of a Great Decoupling, Great Volatility, and a Great Reset.
- The ‘Great Decoupling’ is driven by differing inflation pressures and policy responses across countries, combined with significant geopolitical risks motivating less globalisation and more onshoring. This may lead to more investment risks, but may also create alpha opportunities as differentiation across countries widens.
- The ‘Great Volatility’ reflects the rise in return volatility across most asset classes, in response to geopolitical risks, high inflation, and tighter monetary conditions.
- The ‘Great Reset’ refers to the rise in real bond yields, especially in the US, which may reflect a return to a more appropriate cost of capital.
- Gold can serve as a useful hedge against geopolitical risks, while the USD may continue benefitting from a still hawkish Fed.
- There is still further scope for defensive stocks to outperform.
- Growth in Asia is holding up relatively better. In terms of inflation, Asia, especially China with its relatively more benign inflation environment can afford to enact targeted stimulus if needed.
- China’s value stocks outperformance over growth, is likely to continue.
- In Developed Markets, US equities have priced-in a lot of bad news. The US labour market has been resilient. We prefer US equities over European equities.
- We remain positive on sectors underpinned by well-established drivers like e-commerce, consumerism, healthcare, and renewables.
- In fixed income, we remain negative on duration as rising yields could overshoot. There is opportunity however for buy-and-hold to maturity investors to lock in potentially higher yields at this point.
- Key signposts to watch for a more favourable environment include confirmation that inflation has peaked (implying planned monetary conditions may be tight enough), and stabilisation in China’s real-estate market.
You may also hear from our Strategist, Robert St Clair, who highlights the opportunities to pursue in an environment shaped by the 3G forces of a Great Decoupling, Great Volatility, and a Great Reset.