Fidelity : Global Asset Allocation Insights - January 2023
With more clarity on the level of terminal rates, attention will now shift to how long rates stay there.
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We remain underweight equities although we have reduced the size of this position.
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We prefer the relative safety of government bonds, which benefit from higher yields and falling interest rate volatility.
Macro outlook
Bank of Japan’s half pivot opens the door for YCC policy exit
But the exit door is now open for an end to the BoJ’s ultra-dovish policy stance. The last major source of global liquidity is being closed, amplifying the existing hawkishness of key central banks and the impact that is having on both asset markets and the real economy as we enter 2023.
- will be watching 10yr overnight index swap (OIS) rates and 10yr JGBs, as well as monitoring any BoJ buying to defend the new ceiling.
Powell provides another hawkish push
The Fed’s insistence on keeping rates meaningfully above neutral raises the risk of further damage to the economy.
ECB rates stance raises risks of financial instability for 2023
In addition, the bank announced it would begin to shrink its Asset Purchase Programme portfolio in March, also in line with expectations, by stopping the reinvestment of 15 billion euros per month of the proceeds of maturing bonds.
This notably hawkish message was in line with the tone of the governing council’s policy statement and with the press conference by President Lagarde that followed.
We believe inflation in Europe should start to fall meaningfully in the second quarter of 2023.
Cautiously optimistic on China
- We expect consumption to be the main driver of this, given the CEWC singled it out as a top priority.
Equities
US
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we downgrade US equities to neutral
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We maintain a negative view on Europe due to the poor growth outlook and the hawkish ECB.
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We are overweight emerging market equities, largely driven by the rapid phase-out of China’s zero-Covid policy.
Fixed Income
- we prefer the relative safety of investment grade bonds.
- we maintain our overweight US Treasuries versus German Bunds position.
Currencies
currencies we are overweight the euro and underweight the pound sterling. The BoE is considerably more dovish than the ECB and the UK faces serious economic challenges including a weakening housing market and tightening fiscal policy.