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In our macro 'base case', weaker growth helps to push inflation back towards central bank targets.
Our macro “base case” on a 12-month horizon expects mild recessions ahead. A productivity boom is central to the goldilocks environment, while the 'soft landing' scenario looks most closely aligned to current market pricing across both equities and fixed income. Stagflation is likely the most challenging scenario for most investors, but we would expect selected alternatives and commodity strategies to outperform cash.
Macro: Developed market economies slip into mild recessions. Weaker growth helps to push inflation back towards central bank targets. Interest rates are eventually cut, albeit reactively rather than proactively, and to levels still well above pre-pandemic lows.
Markets: Moderate downside for stocks, with higher quality and income strategies outperforming. Positive environment for core fixed income, as yields are supported by markets pricing in further rate cuts ahead.
Macro: Global growth reaccelerates while inflation continues to moderate, thanks to a combination of stronger productivity growth and rising labour participation helping to ease labour market pressures. Interest rates are lowered slightly, but significant cuts are not required given healthy levels of activity.
Markets: Strongest scenario for stocks, with higher beta and less highly valued areas such as small caps outperforming. Core bonds provide healthy income streams but yields remain largely rangebound.
Macro: Growth remains close to, or modestly below, trend across developed markets, while inflation falls back towards 2%. Interest rates are gradually lowered back towards “neutral”, but more substantial rate cuts are not required.
Markets: This scenario appears most aligned with current market pricing across both stocks and bonds. Core fixed income delivers coupon-like returns, while stock markets are largely rangebound.
Macro: Sticky inflation forces central banks to hike further into restrictive territory as policymakers fear a loss of credibility. Despite the damage this does to the global economy, rates are held in restrictive territory given elevated inflation pressures, resulting in a deeper recession.
Markets: Very negative environment for stocks, with pressure on both earnings and multiples. Rising yields on core fixed income lead to losses as stock/bond correlations remain positive. Real assets and commodity strategies outperform cash, while hedge funds that can benefit from higher volatility also perform well.