You can debate whether stocks, having fallen 20% or more, are now cheap or whether they have further to fall. The answer depends on those earnings expectations, and so we think it makes sense to be underweight equities.
Fixed income is more interesting, in our view, particularly longer-dated bonds such as 30-Year Treasuries. There have been moves in 2-Year to 5-Year bonds this week that have been unprecedented. Central bankers around the world have been worrying that they are behind the curve in controlling inflation and have been raising rates aggressively. That has pushed up yields on short-dated bonds.
We see tentative signs that inflation is starting to roll over. Consumer price data, which has been running way above the expectations of central banks, may be beginning to ease. Some corporate earnings are dropping from elevated levels, and weekly jobless claims are starting to pick up. In commodities, energy and agricultural products remain high as they are impacted by the Ukraine crisis, but prices of industrial metals such as zinc and copper have fallen.
Will inflation ease quickly enough to force central banks to ease off and become more dovish? Probably not — that is a discussion for Q3 or Q4. I am not hugely worried about inflation, but growth projections are more of a concern. For the last 14 years central banks have been printing money to buy bonds. We are entering a period now where major central banks (except in Japan) want to reverse that and shrink the size of their balance sheets. This has caused people to worry about the cost of capital, and what that means for corporations – that is what has caused the volatility.
It makes sense to have some exposure to commodities. This year, almost all asset classes have had losses. We have looked at how to build diversification across our strategy and how to navigate volatile markets.
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