These issues hindered otherwise encouraging news flow encompassing economic activity, inflation and corporate earnings. Despite the steep inversion of the US yield curve, historically a reliable harbinger of a future recession, global economic data have generally been better than analysts expected, raising the chances of an economic soft landing.
Inflation pressures continue to moderate, as shown by weak commodity prices and business surveys that indicate further progress towards the definition of price stability adopted by central banks. In this context, market participants are increasingly confident that the peak in monetary policy rates is drawing closer.
Finally, the first quarter earnings season has so far shown that corporate profitability has remained resilient, particularly for large tech companies. Despite the uncertain economic outlook, this increased the chances that profits for the whole of 2023 will come in higher than it was feared at the beginning of the year.
What are the implications for the asset allocation of a diversified portfolio? In our view, a moderate overweight in both equities and bonds is justified. Within equities, the preference remains for emerging markets and in particular Asia, considering the expected recovery of the Chinese economy, at the expense of the US, UK and Swiss markets. Among fixed income assets, the increased level of bond yields and the reduced need for further aggressive tightening by central banks means that investment grade bonds offer an attractive mix of risk and returns in our view. Furthermore, in the context of less favourable financing conditions and persistent idiosyncratic risk factors, government bonds should offer greater protection to the portfolio against possible spikes in market volatility.
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