It's not looking good.
After financial markets saw major disruptions in the past 12 months -- led by inflationary trends and rising interest rates -- banking turmoil in the first quarter of this year has only added fuel to investor concerns.
It's commonly believed that the era of loose monetary policy is now over -- and concerns about more companies requiring financial rescues or going bankrupt are mounting.
Volatility in bond markets -- at its highest in March 2023 since 2008 -- is also an example of growing market worries about where the next financial crisis could erupt.
AsianInvestor asked fund managers what investors could expect over the rest of the year, and where they could find pockets of growth.
The following contributions have been edited for clarity and brevity.
Sylvia Sheng, global multi-asset strategist
J.P. Morgan Asset Management
2023 is overwhelmingly likely to be a year of disappointing growth.
Resilient but sub-trend global growth with stubborn inflation remains our core scenario.
But stress in the banking system and further tightening in financial conditions shifts the probability of a worse outcome higher and we judge the risk of a hard landing at around 35%.
Given our cautious macro-outlook, we currently overweight duration in our asset allocation, particularly in the US, as the end of a Fed hiking cycle often coincides with improved returns from US treasuries.
An inverted curve and high cash yields mean long duration positions may face headwinds in the near term. However, should the growth outlook deteriorate, the likely performance of bonds provides welcome asymmetry to portfolios.
Holding some cash position in portfolios also allows us to take advantage of market dislocations that may emerge.
We are underweight equity with moderate conviction, noting that while earnings are falling and valuations are hardly cheap, sentiment is already subdued, and positioning is light.
In credit we are neutral with a preference for up-in-quality plays.
Robert Samson, joint head of global multi-asset
Nikko Asset Management
Market conditions are beginning to shift after a year of many assets being correlated, usually to the downside.
The recent banking crisis has changed the outlook on several fronts, mainly for the certain drag on bank credit adding to growth headwinds in an already advanced tightening cycle.
This dynamic has rightly shifted the primary concern from inflation to growth, re-introducing the negative correlations between bonds and equities – supportive of mitigating risk in a balanced portfolio.
We believe this relationship will persist – for now.
But are bonds a safe asset for the long term? Not so much in credit and even sovereigns could struggle as some drivers of inflation remain structural, and a recession is only a temporary reprieve.
Longer term, China governments will remain a safer asset than developed market peers for better orthodox policy and inflation so far remaining under control.
Gold is also a safe asset that performs well in eras of high inflation, last experienced in the early 1980s.
Lastly, commodities are a natural safe asset in a world that has underinvested in production capacity where relative scarcity is one of the key drivers of inflation – not dissimilar to the 1960s-70s.
Roger Merz, head of MTX portfolio management
Emerging markets (EM) stocks could offer attractive risk-adjusted return opportunities.
We expect EM companies to post higher earnings growth which can lead to further expansion.
First, the long-term GDP potential growth of EMs should increase again relative to DM countries.
In the wake of the global financial crisis from 2008 to 2009 and Covid-19 pandemic, factors such as population growth (except in China), higher productivity gains and rising capital investment should contribute to this normalisation.
Secondly, there is a significant and growing number of highly specialised and market-dominating companies, especially in the North Asian emerging markets of China, Korea and Taiwan, such as semiconductor manufacturers or battery producers.
Due to their high research and development spending, these global-leading companies should be able to strengthen their market position even further.
This would also lead to growing importance of these high-profit and high-growth sectors, and thus potentially increasing profit growth of EM corporates relative to that of DM corporates.
From a valuation perspective, we are now at an attractive starting point – with the Shiller P/E ratio of EM equities trading at a significant discount (>40%) to that of DM equities. Recently reported record inflows in the asset class confirm a positive sentiment and we expect this trend to continue.
Ramon Maronilla, fixed income portfolio specialist
T. Rowe Price
We think value is back in high yield, but rising macro headwinds are causing price volatility in the credit markets.
Given the asymmetric return profile of credit, avoiding losers is more important than picking potential winners.
Therefore, fundamental research and a risk aware approach are critical.
The default rate outlook for this year is modest as the uncertainties around COVID-19 have led companies to manage their balance sheets conservatively and refinance their debt to extend their maturity profile when it was favorable to do so.
Issuers are well funded as only about 6% of high yield debt is due before 2025.
Europe offers value despite its potential recessionary outlook.
While Europe's economy could suffer a deeper slowdown than the US, the European high-yield market has less exposure to cyclical sectors such as commodities and therefore can be more resilient in an economic downturn.
We also see value in European cable and integrated telecom operators.
This industry is supported by positive long-term trends in media consumption and stable, recurring revenue business models, particularly at a time when growth is slowing.
We are also finding some value in the services sector. This is a large and highly diverse sector with lots of interesting opportunities, but with rising prices resulting from resilient wage growth, fundamental research and selectivity are key.
Björn Jesch, chief investment officer
Although we are used to market participants complaining that right now it is harder than ever to predict the next 12 months, we would argue that this time it is really the case.
Because of this, we currently like the most iconic of all safe havens: Gold. That’s what makes people feel safe in times of geopolitical risks, high inflation, and stress in the financial system.
From a portfolio perspective, gold is not strongly correlated to any other single asset class for a very long time.
We believe that inflation will remain high for some time – good for gold -, we also don’t fear that real rates could jump again as they did in 2022, as sooner or later this could have become a headwind for gold again, despite the recent lack of correlation.
We also like two-year US treasuries.
They are highly liquid and bear little price risk, after last years’ hefty rate increase. That is a positive point now, obviously, with a 4% yield.
And given the short duration, interest rate risk is manageable.
Although we believe that the US dollar is in the process of losing some of its long-held appeal for foreign investors, its demise is a longer-term process. For hedging this year’s risk, short-dated US treasuries are still an excellent choice.