Against a backdrop of continued macro uncertainty and sustained volatility within equity markets, Invesco’s multi-asset team is starting 2023 with credit as its risk asset of choice for its portfolios.
Now that interest rates have risen, Georgina Taylor, head of multi-asset at Invesco, says the concept of Tina (there is no alternative) seems a less valid justification for a positive view on equities.
“Higher yields available across cash, bonds and credit are leaving equities lagging some way behind and are leading investors to believe that ‘there are reasonable alternatives’ (enter Tara stage left),” she said.
“This doesn’t mean equities will stay on the side lines forever, but it does mean the hurdle rate for investing just got higher,” she added.
As a result, Taylor said that within its multi asset portfolios Invesco is maintaining a “cautious” and “selective” stance on equities near term.
“Yields on credit are now very attractive and whilst we believe the earnings downgrade cycle is still to come, balance sheets remain strong meaning that defaults should remain relatively contained,” she said.
“Duration has been painful in 2022 but as we transition to a world of slower policy tightening and increased recession risks, the traditional inverse equity/bond correlation can be restored,” she added.
“Selectivity is key though. Areas of the rates market such as Australia where there is a stronger feed through mechanism from higher interest rats to economic growth look particularly attractive.”
‘Material anomalies’
Outside of more traditional asset classes, Taylor said multi-asset portfolios with a wider and more flexible ‘toolkit’ are best positioned to benefit from the “material anomalies” that emerged last year.
“Being long the Japanese yen, for instance, is one such example after one of the most brutal years for the currency in history,” she said.
“Relative value trades or in some cases, even selling certain parts of the equity market look like an interesting diversifying tool in this environment,” she added.
