Where are the opportunities in fixed income?

Government bond yields have fallen from their early March highs as banking sector turbulence added to fears of slowing economic growth. We don't think a full-scale banking crisis is likely. But we do see a higher probability that central bank rate-hiking cycles will end sooner. At the time of writing, markets are pricing a peak in the US federal funds rate in May.

With the likely end of the rate-hike cycle approaching, and risks to the US growth outlook mounting, we think it's time to increase exposure to bonds. Yields, though off their peak, still look attractive, and we see the potential for capital gains in the event of a deeper economic slowdown. We think investors holding excess cash should consider opportunities to lock in today's yields. We prefer high grade (government), investment grade, and sustainable bonds relative to high yield bonds. We also like emerging market bonds.

Can alternatives help navigate correlated markets?

Alternative assets like hedge funds and private market investments can provide investors with the opportunity to diversify their sources of return at a time of heightened uncertainty in global markets, if they are able to tolerate the risks involved.

In hedge funds, we think strategies that can capitalize on market dislocations while providing stable diversification benefits should be well positioned in a year when uncertainty and macro risks are likely to stay elevated. We like macro managers’ ability to take long/short positions across a range of asset classes, regions and financial instruments; equity market neutral funds’ appeal in providing uncorrelated returns; and multi-strategy funds’ diversified approach and versatility. Meanwhile, private market secondaries and distressed strategies could be well positioned to buy assets at attractive valuations.

Investors in alternative assets must be able to lock up capital for longer and should consider risks like reduced liquidity, higher costs, and complexities.

What are the implications of China's recovery?

China's reopening has paved the way for an economic recovery in 2023. The official March PMI data underlined that the rebound remains on track. Backed by a resurgence in consumption and resilient investment, we expect Chinese GDP growth of around 5.5% y/y this year.

MSCI China fell 1% last week after three weeks of gains. But we see further upside for Chinese equities, supported by strong earnings growth. We retain a most preferred view on emerging market equities, including Chinese stocks, and we see opportunities in reopening beneficiaries. We also think select property developer bonds, commodities, the yuan, and the Australian dollar may emerge as winners as China's economy continues to pick up.

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