- Diversify beyond the US and growth
We think investors should diversify beyond the US and growth stocks. We like value, including energy, which should be more resilient if inflation proves sticky or rates go up by more than expected. Earlier inflection points in China and Europe favor outperformance in select European names, emerging market equities, and some early-cycle markets relative to the US. And with uncertainty around the US economic outlook still elevated, we also like more defensive areas like consumer staples, while utilizing capital preservation strategies where applicable.
- Seek income opportunities
Bond yields have increased in recent weeks, reflecting the prospect of higher interest rates and boosting the range of options for investors seeking income. We see particular opportunity in investment grade bonds, resilient credits, emerging market credit, select AT1 bonds, and quality-income stocks. Investors should also ensure they take steps to actively manage their liquidity. We are cautious on high yield credit given a slowing US economy.
- Anticipate the inflections
China’s reopening and an end to the winter gas crisis in Europe have brightened the growth prospects for emerging markets and Europe. We therefore see opportunity in emerging market equities, including China and stocks exposed to China’s reopening, and commodities. We also think early-cycle markets like Germany, select semiconductor stocks, and select Asia-Pacific currencies look well positioned to benefit from an upturn in growth in the region.
- Seek uncorrelated hedge fund strategies
Monetary policy expectations are likely to remain a key market driver in the months ahead. This can lead to both equities and bonds moving in tandem, and means that uncorrelated hedge fund strategies such as macro, equity market neutral, and multi-strategy funds could play a particularly important role in diversifying portfolios.
- Position for the era of security
One year after Russia’s invasion of Ukraine, the war continues and the world’s energy landscape has been fundamentally changed. Meanwhile, heightened tensions between the US and China have led to a renewed focus on national and technological security. We believe we are at the early stages of a new era of security, in which energy security, food security, and technological security will be increasingly prioritized, even if they come at the cost of efficiency. This will have effects across the investment landscape, including in themes like renewable energy, greentech, and cybersecurity.
- Invest sustainably
Despite relative underperformance in certain parts of the sustainability investment universe over the past year, the long-term performance of sustainable investments remains strong on an absolute and relative basis. Sustainability can be a key driver of corporate performance, and we believe that companies that manage their business, stakeholder, and environmental impact better should also be well positioned to deliver on financial results. Investors need to diversify by sector, style, and asset class to ensure more consistent performance through the cycle.
- Seek value and growth in private markets
Putting fresh capital to work in private markets following a period of declines in public market valuations has historically been a rewarding strategy. In the current environment, value-oriented strategies are becoming increasingly attractive, in our view.
See the full Monthly letter, Inflections diverge , 23 February, 2023.