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How can I position for key inflections?

Market narratives around inflection points for economic growth, rates, and inflation have continued to shift as investors assess the latest data. Concerns over the health of US regional banks resurfaced following the collapse of First Republic Bank. Policymakers continue to act decisively to avert a systemic crisis. But we think tightening credit conditions are likely to take a toll on US economic growth. Meanwhile, the lagged effect of the most rapid Federal Reserve hiking cycle since the 1980s is continuing to feed through into the economy.

In an uncertain environment, we see better risk-reward in high-quality bonds than in broad US equity indexes. We do not think the latter are adequately reflecting the risks to the US economic outlook, and believe high grade (government) and investment grade bonds should be better placed as growth slows. Within equities, we recommend diversifying beyond the US and growth stocks in favor of emerging markets, which should benefit from China's rebound and a weakening US dollar. We maintain a most preferred view on gold, and see it as a good portfolio diversifier.

Watch our CIO Monthly video, “What is priced in?” (20 April 2023) for more.

Is the US dollar set to weaken further?

The US dollar's downtrend has paused over the past month. The Dollar Index has risen 0.7%, though it remains more than 10% below its September 2022 peak. But we think the approaching end of monetary tightening and a less appealing US growth picture should still lead to a broadly weaker USD over the remainder of the year. The Fed is likely to cut rates earlier than other major central banks, in our view.

Investors looking to position for a weaker dollar should diversify their dollar cash or fixed income holdings, hedge outright, or position in options and structured strategies. In our global FX strategy, we maintain a preference for the Australian dollar, given its exposure to China's rebound and the Reserve Bank of Australia's recent hawkish commentary. In addition, we hold a most preferred view on the Japanese yen, and forecast the USDJPY falling to 120 by year-end (from 137 at present). On a relative basis, we also expect the greenback to weaken against the euro, Swiss franc, and sterling by the end of the year.

Can alternatives help navigate macroeconomic uncertainty?

Alternative assets—including hedge funds and private markets—can provide investors with the opportunity to diversify sources of return at a time of lower “beta” returns from equities, provided investors can 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 an uncertain environment. 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. In private markets, we think 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.

For more topics, see Top 10 questions answered.