Insight

IFI Multi-sector asset allocation outlook Q3 2023

IFI Multi-sector asset allocation outlook Q3 2023

Macro factor summary 

Slow, disinflationary growth is the current macro theme. The global economy continues to avoid recession and is realizing low, but positive, growth as underlying strength in the labor market and services consumption pushes economies along. As we have been expecting, inflation has been coming down quite quickly in recent months. 

The post-pandemic stimulus has worked its way through the economy and supply chain issues have been resolved, easing inflationary pressure. This positive macro backdrop is increasingly being acknowledged by the market and is a key reason that market performance has been so positive in recent months, in our view. It is becoming increasingly likely, however, that this good macro backdrop is being priced into markets.

The ongoing headwind for markets is the hawkish stance of most global central banks, who are still raising rates despite the good news on inflation. As inflation continues to decline and nominal growth comes down with inflation, high nominal interest rates are increasingly likely to have an impact on growth and markets. Said another way, as inflation comes down sharply real interest rates are rising. Risks for the economy and markets may develop if central banks overstay their welcome at higher levels of interest rates.

Asset allocation summary

We favor high quality credit assets in the current environment and being modestly overweight duration. The overall level of fixed income yields remains attractive, and despite tightening of valuations, we still believe technicals and fundamentals favor high quality credit. Investment grade bonds will likely gain some protection from embedded duration if a recession occurs. In the medium term, we favor longer maturity bonds in this disinflationary environment. In the shorter term, we are toward the top of our expected ranges for longer maturity bonds in the US and Europe.

Risk position summary 

We are growing more cautious on risk taking. While the growth and inflation outlooks are positive for markets, the positive backdrop increasingly appears priced into markets. The risk of central banks keeping interest rates high despite progress on inflation is growing and this could turn into a headwind for economies and hence for markets. In our view, the key to risk positioning going forward will be central bank stance.

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