With inflation stubbornly high, interest rate cuts remain a distant prospect. (Shutterstock)

What should I do with my stocks?

Stocks have enjoyed various rebounds during 2022, as hopes have resurfaced that the Fed will pivot to a more dovish stance. But none of these rallies have lasted. With inflation stubbornly high, interest rate cuts remain a distant prospect. Aggressive tightening will likely lead to further economic weakness and a contraction of US earnings in 2023. But despite the fall in equities, stocks have not become cheap relative to bonds. As a result, we advise adding downside protection. In equity markets this means tilting exposure to sectors such as healthcare and consumer staples. Within fixed income, we see high grade and investment grade bonds as attractive defensive assets.

What should I do with my China exposure?

Chinese equities rallied 11% last week amid volatile trading as markets reacted to speculation about the country's zero-COVID policy. We think it will take concrete policy changes to see a sustained recovery, and remain cautious in the short term. We retain a neutral stance on Chinese equities within our Asia portfolios and recommend a benchmark allocation.

How can I hedge downside risk?

Aggressive central bank action, geopolitical tensions, elevated energy prices, political turmoil, and unforced fiscal errors have all contributed to renewed cross-asset volatility. Although equities have already fallen a lot in absolute terms, the valuations of risk assets do not yet reflect a “bear case” scenario, and we advise investors to add insulation to their portfolios. One way of doing so is to consider exposure to hedge funds. Current conditions favor macro strategies, low-beta managers, multi-strategy funds, and market-neutral strategies.

For more topics, see Top 10 questions answered.

Main contributor: Christopher Swann