Cross Asset Investment Strategy - February 2023

Play market rotations, with a focus on China

Uncertainty over growth, inflation and corporate earnings persists, even though there has been a mild improvement on the economic front. These trends underscore the need to be active and well diversified. In equities, investors should stay cautious and consider playing rotations favouring China but become more cautious on DM (US, Japan). European valuations also look attractive but we are defensive. In fixed income, US government bonds may help safeguard portfolios but corporate default outlook could deteriorate. This leads us to prefer high quality IG (over HY) and select EM names. Overall, we stay agile, defensive as some areas of the market could correct and present opportunities later.

Why and what if inflation falls faster than expected?

High inflation has not triggered a wage-price spiral in the advanced economies. Monetary tightening has contained inflation expectations and a continued firm stance will bring down inflation, possibly faster than expected.

February 2023

We revise the probabilities of our alternative scenarios. Some of the risk factors we identify may occur in our central scenario, which is probably not yet fully priced in, especially by equity markets. We think risks remain skewed to the downside in the short term, but at the same time, we believe that it would take an unlikely combination of several risk factors to trigger the downside scenario at the 12-18 month horizon. At this horizon, we believe that the upside scenario of rapidly falling inflation is now more likely to materialise. Indeed several factors of different nature can push prices down: easing gas prices, combined tightening of global monetary policies (which has a delayed impact), and normalisation of global value chains thanks to China’s re-opening.

February 2023

Macroeconomic Picture by area and Macro and Market forecast.