Asset Allocation Update – Not Every Landing Will Be Soft


A survey from our multi-asset team shows an expected 60% probability of a recession over the next 12 months, with hawkish central banks and higher bond yields to boot. Earnings growth expectations seem unlikely to materialize in the more challenging macro environment we expect.

Bonds don’t signal recession, stocks do (perhaps wrongly)

US 10-year Treasuries are currently experiencing their worst first half since 1788, according to some projections. Although 32% of the US yield curve is inverted, this does not mean that bonds are signaling a recession. For this, it would be necessary to invert 60% of the curve.

Yet, at the same time, markets expect the US Federal Reserve or European Central Bank to be unable to hold firm in the face of tighter monetary policy. Instead, a sharp reversal in the rate hike cycle is expected from next year.

Stock prices clearly reflect investor concerns: using a simple measure of stock “quote”[1] suggests that recession fears are much greater in equity markets than in bonds.

However, we must remember that, firstly, declines of 40% are not uncommon and current levels are “only” halfway there; and, second, and in reverse, that the stock market has valued nine of the last five recessions, i.e. markets have often fallen significantly when in the end a recession has not materialized.

A rebound is possible, but not sustainable

Recent weakness could be followed by rallies of near-term relief, but with earnings expectations[2] yet to correct lower, we are wary of equities. Without the positive contribution from expected growth in earnings per share (of over 7% for the broad ACWI index), equity returns to date would have been weaker than the -22% recorded so far.

For now, Europe is our favorite short, facing geopolitical risk, inflation/supply chain challenges, political pressures and growth/earnings challenges. We have been cautious on European equities since the day before the outbreak of war in Ukraine, further reducing our exposure in April and May.[3]

We are positive on Chinese technology stocks (via our MSCI China exposure) and Japanese equities (mainly held via our Topix exposure).

Asset class views as of June 22

[1] Based on their behavior over the last 11 cycles

[2] The disconnect between macro-indicators (such as the ISM) and BPA is notable

[3] Earlier in the year, we closed our long positions in US small and large caps


All opinions expressed herein are those of the author as of the date of publication, are based on available information and are subject to change without notice. Individual portfolio management teams may have different views and make different investment decisions for different clients.

The opinions expressed in this podcast do not constitute investment advice.

The value of investments and the income from them can go down as well as up and investors may not get back their initial investment. Past performance does not guarantee future returns.

Investing in emerging markets, or in specialized or restricted sectors is likely to be subject to above average volatility due to a high degree of concentration, greater uncertainty as less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).

Some emerging markets offer less security than the majority of developed international markets. For this reason, portfolio transaction, liquidation and custody services on behalf of funds investing in emerging markets may involve greater risk.


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