M&G Investments: Quarterly Equities and Multi Asset Outlook - Landing in the dark

Landing in the dark

• As abhorrent as recent events in the Middle East have been, financial markets have, for now, taken these events in their stride, with some flight to safety in public markets, but fairly mild reactions overall.
• If the situation escalates, potentially from a declared or assumed involvement of Iran, it could lead to a tightening of oil export sanctions. Given the current tight supply/demand dynamics, this would put further upward pressure on oil prices.
• Investors remain focused on the impact of ‘higher for longer’ interest rates. Given elevated interest rates, expectations of further demand contraction appear logical due to higher financing costs affecting consumers and corporates.
• Amid rising equity risk premia, our Tactical Allocation Multi Asset strategies have reduced wider equity market exposure and added to fixed income.

The macroeconomic backdrop is proving more resilient than many had expected, particularly in the US, where higher interest rates have not affected many consumers and corporates yet. However, with excess savings falling and student loan repayments restarting in the US, we could see future erosion of disposable income. Amid rising equity risk premia, although we still see pockets of future positive performance in equities, we have turned more cautious on the overall equity market in the near term. Our Tactical Allocation Multi Asset strategies have reduced wider equity market exposure and added to fixed income.

Within equities, given the uncertain macroeconomic backdrop, we prefer investments where structural drivers are stronger than cyclical exposure, and continue to favour long-term themes such as infrastructure, the low-carbon ecosystem, and innovation, including AI. In the short term, the compression in performance differential in the recent sell-off potentially offers a fresh opportunity to harvest alpha from selection. With fears of ‘higher for longer’ rates bringing valuations of utilities and real estate companies to multi-year lows, we see a timely prospect to add to the infrastructure space.

Elsewhere, long-forgotten to some investors in a low rate environment, convertible bonds (CBs) could be beneficiaries of a ‘higher for longer’ backdrop, with looming debt maturities and higher financing costs potentially prompting corporates to seek cheaper alternatives to straight bonds.

The information provided should not be considered a recommendation to purchase or sell any particular security. The views expressed in this document should not be taken as a recommendation, advice or forecast. Past performance is not a guide to future performance. The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested.

Download the full report