Asset managers remain dovish on equities and bonds

Despite the early-year rebound in the equities market and expectations of an easing in monetary policy conditions, equities and long-term bonds remain out of favour with global asset managers. 

Equities and bond markets took a hit over the course of 2022, with the world’s central bank’s pursuing aggressive rate hiking strategies to quell inflationary pressures.

But amid signs of a faster-than-expected progress towards inflation targets, central banks are beginning to soften their monetary policy stances.

However, according to global asset manager T. Rowe Price, the outlook for equities and bonds remained dim.
The firm said recent volatility in the global banking sector, particularly across the United States and Europe, had exacerbated fears of a looming global recession.

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Additionally, despite slowing their tightening cycles, central banks had kept the door open to further tightening.  
These outcomes would both cast doubt over company earnings forecasts and devalue long-term bonds.

“We remain underweight equities in favor of bonds and cash,” T. Rowe Price noted in its latest analysis.

“Equities vulnerable to weaker growth and earnings backdrop, and still aggressive central banks could weigh on bonds as they continue to battle inflation, while cash continues to offer safety and attractive yields.”

The firm said it had “neutralised” its overweigh equities allocations off the back of stresses in the banking system, and reduced its exposure to Australian bonds after the sharp drop in local yields over the past month.

Instead, T. Rowe Price said it was “adding duration” with US Long Term treasuries to hedge against mounting risks.

Peer global asset manager BlackRock also remained dovish on equities and bonds, stating rate cuts are “not on the way to help support risk assets”.

“That’s why the old playbook of simply ‘buying the dip’ doesn’t apply in this regime of sharper trade-offs and greater macro volatility,” BlackRock observed.

“The new playbook calls for a continuous reassessment of how much of the economic damage being generated by central banks is in the price.”

BlackRock noted a number of warning signs across developed markets (DMs), including declining housing prices, deteriorating CEO confidence, delayed capital spending plans, and consumers depleting savings in the United States.  

Meanwhile, tighter financial conditions in Europe were “biting” despite energy pressures abating.

“The ultimate economic damage depends on how far central banks go to get inflation down. We think they will halt rate hikes once the economic damage becomes clear,” BlackRock observed.

As such, BlackRock said it was “tactically underweight” in DM equities, which it said were “not pricing the recession we see ahead”.

Across the fixed income market, BlackRock was favouring short-term government bonds, with future rate hikes to undermine the value of longer-term securities.

“Short-term government debt looks more attractive for income at current yields, and we like their ability to preserve capital,” BlackRock noted.

“We like investment-grade credit and think it can hold up in a recession, with companies having fortified their balance sheets by refinancing debt at lower yields.”

The asset manager said in the “old playbook”, long-term government bonds would have formed part of its allocations, given they had historically shielded portfolios from recession.

But according to the group, central banks were unlikely to respond to softening in global market conditions with aggressive rate cuts.

“Central banks are unlikely to come to the rescue with rapid rate cuts in recessions they engineered to bring down inflation to policy targets,” BlackRock observed.

“If anything, policy rates may stay higher for longer than the market is expecting.

“Investors also will increasingly ask for more compensation to hold long-term government bonds – or term premium – amid high debt levels, rising supply and higher inflation.”

In Australia, Reserve Bank of Australia (RBA) governor Philip Lowe had confirmed the central bank does not envisage a shift to an easing bias any time soon.

“I do think it’s premature to be talking about interest rate cuts,” he said.

“Remember, we’ve got the highest inflation rate in 30 years, the lowest unemployment rate in 50 years, and still two years before we get inflation back to the top of the target range.

“So, I think it’s too early, way too early, to be talking about interest rate cuts and the balance of risk lie to further rate rises, but it will depend upon the data.”

The governor went on to note the central bank was prepared to keep interest rates “higher for longer”.

“If we need to keep interest rates higher for longer to make sure that inflation comes back to 2 to 3 per cent range [in a] reasonable time, we’ll do that,” he said.

“But that will be determined by the flow of events.”