Bonds are Back on the Radar Screen

Saturday 27 May 2023

Global Investment Views, Equity, Fixed income

   

Bonds are Back on the Radar Screen

June 2023 | Markets are pricing in a rosy scenario in which economic deceleration will force the Fed to cut rates in 2023. However, we believe the Fed will stay on hold for 2023 and cut rates only in 2024. Inflation is cooling slowly, and the US economy is cooling down as well. From an equity perspective, we remain concerned about future profits, which leads us to stay defensive on equities and credit. On the fixed income side, we stay constructive on US duration and expect the US yield curve to steepen.

01 |  Given uncertainty regarding inflation expectations, the likelihood that Fed will cut rates any time soon is low

02 | The US economy is cooling down GDP is expected to start slowing substantially in Q2 with a contraction seen in the second half of the year. The resilience of the US consumer is the key variable to watch.

03 | We believe markets are too complacent and are ignoring the wall of risks. There are signs of a gaps between fundamentals and excessive valuations in many areas.

Bonds Definitely Back on the Radar Screen

Important Information

Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of May 27, 2023. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.

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We believe valuations are excessive in some segments, such as mega-caps, where profit margins are also high. But the key question is whether these high margins justify current valuations? And will these companies be able to grow their top line quickly, while maintaining margins in a context of increased global competition and exhausted consumers? On the other hand, judging the direction of the economy is becoming increasingly difficult.

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The strength in the US economy keeps us confident that the Federal Reserve will not begin policy cuts before the end of May, and the European Central Bank will also remain vigilant on disinflation. Sluggish growth expectations going forward mean the emphasis on quality credit and valuations will likely increase. Equities markets are continuing to display acute anomalies relative to the historical norm, with high valuation dispersion between growth and value and an extraordinary concentration in the largest securities. We are prioritizing fundamentals, and exploring strong businesses in Japan and US value sectors.

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Bonds and emerging markets stand out in the Santa rally

The rapid retreat in fixed income yields caused by falling inflation and dovish central banks has affected valuations, but bonds are still a good diversifier as we enter a slowdown. However, we may see some uptick in yields (owing to inflation). The recent equities rally is largely based on easing financial conditions and expectations of a soft or no landing next year. There is a disconnect between valuations in some segments and their earnings potential, which raises risks of deratings.

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