War/Conflict
China’s reopening faltered and now it is applying moderate stimulus. OPEC 2.0’s production discipline is getting results, with oil prices climbing. The Fed will not be able to deliver dovish surprises in Q4 2023. Investors should expect stock market and commodity volatility and prefer defensive positioning.
The geopolitical backdrop remains negative despite some marginally less negative news. China’s stimulus is not yet large or fast enough to prevent a market riot. Two of our preferred equity regions, ASEAN and Europe, are struggling to outperform. Investors should stay defensive overall.
Investors should underweight global equities and risk assets; overweight US stocks relative to global; and overweight defensive sectors versus cyclicals.
China removed checks and balances in its political system to deal with a very dangerous economic transition. The transition is going badly, yet investors cannot rely on checks and balances to correct or prevent policy mistakes. The Taiwanese election is a looming bellwether.
The global economy will not enjoy an “immaculate disinflation” but will suffer a very maculate one due to China’s growth slowdown and restrictive monetary policy in the developed world. Investors should stay overweight low-beta assets.
In Section I, we audit the market’s “soft landing” narrative in response to a meaningful challenge to our cautious stance from recent financial market developments. We acknowledge that US economic growth was stronger in the first half of the year than many investors expected, but we are unmoved by the recent uptick in “soft landing” hopes. A “soft landing” outcome very likely necessitates interest rate cuts before recessionary dynamics emerge, and it is far from clear that rate cuts or (especially) an easy monetary policy stance are likely to materialize over the coming year. As such, we continue to believe that conservative portfolio positioning is appropriate. In Section II, we discuss some simple approaches that we use when valuing the major asset classes that we cover. We conclude that global ex-US equities and ex-US developed market currencies are the main assets that can be considered “cheap” today.