Bonds deserve attention, especially those denominated in the strong US dollar. Any bet on fixed income is dependent on where you think inflation will peak. In corporate credit, favour businesses with strong balance sheets and cash flows. A zero weighting to high-yield bonds makes sense.
As for stocks, defensive choices depend on how protected companies are from inflation, higher rates and slower growth, as Rob Buckland of Citi points out.In the 1970s, energy and mining shares outpaced inflation. The same bet has worked this year. Two of the top three sectors within the MSCI ACWI include those groups. Currently, the value of all commodity consumption as a proportion of global GDP — nearly 11 per cent — approaches that of the second OPEC oil shock in 1979.
Rising rates require the typical investor to tilt away from expensive growth. These are companies whose valuations depend on low, long-term discount rates, in sectors such as tech and renewables. Instead, buy defensive stocks with less “earnings beta” or sensitivity to broader profits volatility. Aim for telecoms and other utilities, consumer staples and healthcare shares.
Momentum-following algorithms tend to perform well in extended market corrections. Shares in Man Group, whose AHL product group meets that description, are up 11 per cent over six months. Pundits do not unanimously predict a recession. Full employment and high bank capital ratios make RBC Wealth strategists optimistic about financials this year. But even they accept risks are mounting. They tip the UK stock market for its relative cheapness.P 500 index is just above its 10-year average. Shiller’s cyclically adjusted price/earnings ratio, which aims to smooth out economic peaks and troughs, remains relatively high.
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