The challenge, of course, is that markets can move quite quickly—we have elections in 40 countries this year, a tense geopolitical environment, and central banks in the middle of “landing the economy,” which can always create volatility.
With cash rates starting to fall, investors may want to consider being invested. But investors will need flexible approaches to navigate these markets and potentially take advantage of buying opportunities as they arise. After all, the next card to be dealt can significantly change the hand you hold.
Pricing In a Fed Pivot
Last quarter, investors were concerned about further rate hikes from the Federal Reserve (Fed), while we were firmly of the opinion that rates had reached a plateau. Three months is a long time in the bond markets, as we now have a situation in which investors are itching to price in a Fed pivot.
We’re not predicting significant rate cuts given the backdrop of high levels of employment. Although inflation continues to move in the right direction and wage growth has peaked, it feels premature for the Fed to cut so aggressively. As a result, we’ve closed our long-duration2 positions and favor steepeners3 to benefit from lower rates.
To the extent that the Fed may choose to emphasize falling inflation rather than tight employment conditions, we would view this as being more bullish for equities than for bonds because we still view the risk of an imminent recession in the US as being low.
The 3D Reset and its Implications
More broadly, and in the context of the 3D Reset (decarbonization, deglobalization, and demographics; FIGURE 1), the next phase is to really think about what policies may emerge from the reset. This is partly a function of the different conditions that each economy faces and the hand of cards that each policymaker has been dealt. This economic divergence is a source of investment opportunity:
