2023 has started with a positive tone. Most risk markets from equities to crypto are up, and we identify four driving themes:
- Investors expect the Fed to end its hiking cycle soon. Both bonds and equities have rallied as a result.
- China has abandoned its zero-COVID strategy and is doubling down on growth. This has seen Asian equities, commodities and China-linked FX perform well.
- Europe has stabilised thanks partly to a mild winter and falling natural gas prices. This has seen European data stabilise and European equities perform well.
- The Bank of Japan (BoJ) has started to widen its yield curve control (YCC) bands. This means the BoJ has allowed Japanese 10-year bond yields to rise.
We have long thought the Fed will eventually hike rates to 7-8%, but we recognise the near-term downshift in inflation. Ultimately, we think inflation will turn out stickier than investors believe. But until then, equities could find support. The China and European news should help equities too. We therefore turn from underweight to neutral on equities. We are cautious of turning overweight for now as equities have rallied a lot already in recent weeks. We would consider being overweight EM equities as the China story also helps that theme.
On bonds, we are more cautious and remain underweight. They have rallied lately and are now pricing rate cuts by the Fed later this year – that could be premature. Moreover, the cyclical news out of China and Europe should put upward pressure on bond yields. Finally, the BoJ allowing Japanese bond yields to rise could provide a global driver for higher yields. We therefore like to remain underweight bonds.
The risk market that we like is commodities. They were battered in the second half of 2022, but the China reopening should see demand for commodities return. Higher commodities could also turn out to be the biggest surprise for 2023, and it could lead to higher inflation. We therefore turn overweight commodities partly due to risk-on and partly to gain tail-risk exposure in the right direction (that is, it hedges against the possibility of inflation returning).
On crypto, we stay neutral. The good news is that crypto markets have priced a lot of bad news on scandals, possibly leaving the improving risk sentiment to drive them. But we prefer a neutral stance as the recent gains have already been quite large.
Finally, we still favour an overweight in cash – our favourite asset in a world transitioning from low rates to high rates.
What Is the Consensus on Asset Allocation?
In this report, we also add a new table of the asset allocation of the largest asset managers in the world. It shows most are underweight US equities and overweight rest of the world equities. They are generally overweight bonds. Richard has explored this in more detail, but in short, our view differs most on bonds where we are underweight. We will see who is right…
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.