Guide to the Markets: Daily edition
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Key themes for 4Q 2023
Bonds are back for income and diversification
Bond markets got a little over optimistic earlier in the year about the prospect of imminent rate cuts, but have now reset back to more compelling valuations (Guide to the Markets – Europe pg 67). Once again we can rely on core bonds for providing portfolio income and diversification from disinflationary shocks (pg 70).
Staying quality focused and defensive in stocks
Most developed world stocks are at or above historical average valuations on forward earnings forecasts that look a little optimistic given our expectations of weaker growth ahead (pg 48). For that reason we would look to focus on the quality segment of the market and dividend paying stocks that are likely to be able to maintain dividends given low payout ratios (pgs 53, 51).
Don’t let 2022 recede too far from memory
2022 was a painful reminder that cost shocks are as damaging for bonds as they are for stocks (pg 70). With a more fragmented global economy dealing with challenges such as the energy transition, our expectation is for more frequent cost shocks (pgs 85, 87). Diversification therefore needs to go beyond bonds to alternatives, such as core infrastructure and timber, which can provide genuine inflation protection (pg 78).
Cash is unlikely to be king
Investors face cash rates that are temptingly high, particularly given numerous uncertainties ahead. However, we are increasingly confident that we are near peak rates (pg 9). Following the peak in a Federal Reserve hiking cycle, bonds have outperformed cash on a two-year horizon in every instance over the last 35 years (pg 73).