@Wellington Management.
Tim Antonelli, CAIA, CFA, FRM, SCR, Head of Insurance Multi-Asset Strategy and Portfolio Manager
The views expressed are those of the author at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only.
Economic growth and corporate earnings continue to surprise on the upside, especially in the US. While valuations are on the rich side, I think fundamentals and policy support a risk-on tilt and that positive sentiment can be sustained. This adds up to what I believe may be a compelling backdrop for increasing allocations to some surplus assets, and particularly equities. Surplus fixed income fundamentals have improved, but valuations aren’t attractive enough for an overweight view.
I have less conviction on duration and maintain a neutral view versus liabilities. The jury is still out on the timing of Federal Reserve rate cuts, but the European Central Bank (ECB) could cut rates earlier and by more given a clearer disinflation picture and weaker growth than in the US. I continue to like reserve-backing fixed income (investment-grade credit and securitised assets) thanks to positive fundamentals and technicals.
In equities, I favour the US and Japan over Europe and emerging markets. The US is my top developed market due to the macro backdrop and confidence in artificial intelligence's (AI) potential to continue underpinning earnings growth. I have a moderately overweight view on Japan and remain sceptical we’ll see any material improvement in China considering problems in real estate and consumer confidence.
I have moved to a neutral view on commodities. I remain biased toward higher inflation in the long term, but richer valuations in oil and gold suggest waiting for better entry points.
Downside risks to these views include a hard landing precipitated by a spike in inflation and a Fed pivot back to tightening, or a stagflationary scenario with sticky inflation and waning growth. Upside risks include an even more benign environment than my base case, with sustained growth that’s well above trend but not inflationary.
I have banged on the proverbial drum for reserve-backing fixed income in this space for what seems like years, but is the tide finally starting to turn in favour of surplus/risk assets? The tailwinds are obvious: Growth has surprised to the upside, inflation is coming down, earnings have supported rich valuations, and financial conditions are easy. This has stoked insurers’ interest in risk assets, something we haven’t seen in some time.
Importantly, central banks are viewed as credible, having worked to tone down the market’s rate cut expectations. The repercussions of a policy error are well understood by markets in all regions: Ease too soon and risk having to reverse course and tighten more aggressively, reviving the possibility of a recession. Ease too late and risk the cumulative effects of restrictive policy tipping the economy into recession.
While this environment may seem too good to be true (and only the 1995 – 1996 period resembles it) …
