Risk assets have further room to grow in the short-term given a still robust US economy and increasing market expectations of a soft landing. However, recession risk is higher over the next 6-12 months, especially on the back of tighter financial conditions. Eastspring Investments’ Multi Asset Portfolio Solutions (MAPS) team shares their outlook for 4Q across macro, asset allocation, equities, bonds, and currencies
Recession risk is higher over the next 6-12 months, especially on the back of tighter financial conditions. Any recession is likely to be concentrated in the developed market economies. As a base case, the Eastspring team does not anticipate the upcoming recession in the US to be very deep i.e. no significant contraction.
The current market environment is supported by a robust US economy and increasing market expectations of a soft landing. In Asia, the recent China policy stimulus is moving in the right direction, and there is optimism that policy effectiveness will improve in the coming months. Given this backdrop, our MAPS team believes that risk assets have further room to grow in the short-term investment horizon. However, if risk assets become overstretched, the team will dynamically allocate into safe haven assets and vice versa.
The team said it is constructive on Asia ex-Japan equities over the medium term, given resilient Asian exports and upward-trending economic data. Supportive policies implemented by Chinese leaders/regulators have stabilised the country’s property market, and in turn the broader region. While Asian equities will not be immune to global growth headwinds, the team expects valuations to trade range-bound as the global slowdown is concentrated in the developed economies.
- As global growth decelerates, most economies, particularly the US, are nearing the end of their rate tightening cycles. As such, the team at Eastpring expects that US rates have more scope to decrease than to increase, moving forward. Despite the hawkish pause by the Fed at its most recent meeting and the Fed Funds Futures market still pricing in a higher for longer rate scenario, our MAPS team believes that the odds of a recession have increased, and US duration is attractive over a 3-month horizon.
Eastspring is overweight the US dollar, based on expectations of “higher for longer” US rates and widening interest rate differentials. Various data indicators are also signaling resilient fundamentals and optimistic market sentiment. Additionally, it recognises the counter-cyclical nature of the US dollar, which tends to outperform during a recession.
