Key highlights for this quarter
GLOBAL ECONOMY
Strong enough to avoid the recession?
Geopolitics and the conflict in the Middle East have taken over as the key focus for investors. Higher energy prices and supply disruptions mean the global economy could be facing stagflationary pressure (P. 18) and demand policy response from central banks and governments. A healthier starting point for the global economy should help ease the economic strain (P. 16), but the duration of higher energy costs could materially weigh on what had been an improving economic outlook.
ASSET ALLOCATION
Is quality the best defense?
The rotation towards non-tech companies was cut short in the first quarter, but the sell-off may have created opportunities across sectors and styles. Growth is not the only option for investors as value finds its way back (P. 36). The return on capital on AI capex and AI disrupted business models are likely to remain as investor concerns, but investors should focus on the longer-term secular nature of the AI deployment (P. 45). Meanwhile, rising bond yields offer more protection to a growth shock should inflation fears not materialize.
FIXED INCOME
When will bond spreads price growth risks?
Tight spreads in credit limit upside to returns, but carry remains attractive and high quality asset hold appeal when markets are nervous (P. 60). For now, recession risks remain low and robust corporate health mitigates risk of default in high yield bonds. However, the potential for tighter monetary policy and a sharp change in the economic outlook means that credit markets will require close monitoring (P. 62).
EQUITIES
Are equities valuations low enough?
There is increasing dispersion between the major players in the AI space but a narrowing in performance between the mega-caps and the rest of the market. Corporate earnings were strong in 4Q but corporates have faced numerous challenges in the first three months of the year and geopolitical uncertainty may lead to downgrades to earnings guidance and earnings expectations (P. 34). Valuations have come down—notably premium for the mega-caps to the rest of the market has narrowed sharply—meaning there may be opportunity to allocate at better entry points than just a few months ago (P. 42).
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