Glass half full or half empty? Seeing light at the end of the tunnel. The respite in global risk assets post-FOMC meeting on Wednesday (4 May) – which saw Fed Chair Powell downplaying the plausibility of a 75 bps hike this year – proved short-lived. Markets have since entered “capitulation mode” with broad-based selloff in equities and corporate bonds. The S&P 500 lost 7.2% while the Technology-heavy Nasdaq index suffered heavier selldown of 10.3% as yield concerns weighed on growth equities. Bonds were not spared from the volatility either with US HY spreads widening 47 bps.
Clearly, investors’ fears have reverberated across risk assets this year on concerns of Fed hawkishness in tackling multi-decade high inflation. Despite the prevailing headwinds, we see light at the end of the tunnel and our optimism is based on:
Alternatives outperforming Equities and Bonds; Defensive CIO asset allocation reaping dividends. From an asset allocation perspective, our strategy of Overweighting Alternatives over Equities and Bonds has paid off in the current environment. Year-to-date, Alternatives* has gained 1.5% while global equites and global bonds lost 14.2% and 12.4%, respectively.
Gold, in particular, proved its resilience by registering a 3.0% increase. Within equities, our long-term conviction on the US has panned out marginally well as the market outperformed Europe and Japan by 1.8% pts and 0.3% pts, respectively.
Stay invested with Barbell Strategy – Focus on inflation winners and quality plays. We advocate portfolio allocators to stay invested with the Barbell portfolio approach (comprising growth equities, dividend equities, high grade credit, and gold as risk diversifier) to steer their investments during this period of extreme market volatility. From a top-down perspective, the key areas of focus will be on:
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