The benign growth backdrop continues and we see little likelihood of a US recession, but the risks around our central scenario have increased and are becoming more correlated.
The growth backdrop continues to be benign: we see low risk of recession in the United States and corporate earnings momentum remains supportive of our positive view on equities. We have become less positive on Asia technology, reflecting the very strong performance of this theme. We maintain a positive view on the Nasdaq.
The risks around our central scenario have increased and are becoming more correlated. Tension in the Middle East persists and strategic oil reserves are now run down. This increases the attraction of energy and mining stocks.
The potential upward pressure on oil prices complicates an already challenging environment for the Federal Reserve. Rate expectations priced into markets are now aligned with our own expectations and we are tactically long the US 10 year reflecting the improved valuation. The Fed delivered the 16 September rate hike we expected, something that was needed for Warsh to prove his willingness to tackle inflation. Even so we expect concerns about central bank credibility to persist, and we hold gold as a hedge against this risk.
We are less positive toward US investment grade debt, reflecting the limited reward for the risk at current spread levels and concerns about AI-related issuance.
Threats of intervention in the Japanese yen and concerns about the Fed’s willingness to raise rates sufficiently to quell inflation have caused us to downgrade the dollar to neutral.
All in all, we remain pro-cyclically positioned in equities but recognise that our view is increasingly priced into markets and that risks are increasing.
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