So far, it has been a challenging year for global markets, mainly reflecting the elevated level of policy uncertainty regarding macro volatility.
Against this backdrop, it has become more complicated to hold a high conviction call on being long duration, owing to a number of central banks adopting a more cautious approach (Theme 1).
Nonetheless, credit remains well positioned to perform in the period ahead, in our view, especially as we think that credit spreads may not be as stretched as they appear due to the higher risk premium embedded in underlying US Treasury yields (Theme 2).
While equity markets are facing potential headwinds, including being priced for perfection, fixed income is back to being an attractive de-risking asset class, especially as we anticipate that the equity–bond correlation will continue to normalize lower (Theme 3).
Global diversification has become critical, following the challenge to US exceptionalism. EM local currency debt is making the most of this new market theme and, with the US dollar under increasing pressure (Theme 4), we believe that the stars are aligned for that asset class.
Finally, the popularity of private credit no longer needs any introduction, but we believe that the asset class may face some headwinds. While an allocation to private debt still makes sense in the broader strategic asset allocation, we would encourage global investors to right-size their exposure, given the anticipated challenges (Theme 5).
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