Do it yourself

If we cut the noise and overcome our recency bias, Indian stocks have given a decent return over the past five years; though this period had been particularly eventful. We witnessed the worst pandemic in over a century crippling the world. A variety of economic and geo-political conflicts impeded the global economy. The financial markets witnessed unprecedented liquidity deluge that led to over US$20trn bonds trading at a negative yield; followed by sharp monetary tightening. The world moved from severe deflationary conditions to sharp inflationary spikes. Central banks cut the policy rates close to zero (even below zero in some cases) and then hiked the rates at the fastest speed in five decades.

In the domestic economy, we saw macro parameters like inflation, fiscal deficit, current account deficit etc. worsening sharply. We witnessed a monetary easing and tightening cycle. Banks went through a massive credit cycle.

The benchmark Nifty50 has yielded an 11.4% CAGR over the past five year (January 2018- December 2022). IT Services (19.6% CAGR) is the only sector that has meaningfully outperformed Nifty50 over the past five years. The sectors that should have theoretically benefitted from abundant liquidity and low rates like Auto (1% CAGR) and Realty (4.5% CAGR) were actually amongst the worst performers, failing even to match bank deposit returns.

The market breadth has not been great. The broader indices like Nifty 500 (10.2% CAGR) actually underperformed the benchmark Nifty50 (11.4% CAGR). In fact Nifty Next 50, that represents the set of 50 largest stocks next to Nifty50, underperformed massively with just 6.4% CAGR. Banks (11% CAGR) and Metals (11.3% CAGR), that many might think to be massive outperformers have performed just in line with the benchmark Nifty50. 

If we observe only the benchmark indices, the situation appears calm and simple. However, the story beyond benchmark indices is quite revealing. For example, consider the following facts:

• Only 384 stocks (out of 1428 actively traded stocks on NSE), have outperformed the benchmark Nifty50 over the past five years.
• 54% stocks (770 out 1428) gave a positive return during the past five years, while 46% (658 out of 1428) yielded a negative return over the period of five years.
• The top 100 stocks gained 267% to 6299% during the past 5 years. These include a variety of stocks, largecap, microcap, midcap, chemicals, textile, infra builders, power, metals, FMCG, ERD services, entertainment, NBFCs, pipes, cables, industrials, pharma, etc. The list however excludes banks, top IT services, and PSUs.
• Over 270 stocks lost more than 50% of their value during these five years.

The primary idea of this analysis however is to assess two things:

1.    Do we have a secular trend in the Indian equities?

2.    Do we have significant pockets of froth in the markets?

The answer is:

We may have a secular trend in the Indian equities. The trend is deepening and widening of growth. A large number of sub sectors from the economy – Materials (metals, chemicals, building material, energy, textile, paper, sugar etc.); industrials; utilities (power, telecom); infra builders and owners; consumer (discretionary, durable, staples and internet); healthcare; financials (lenders, non-lenders and service providers); IT services (engineering, digital, cloud, conventional software, BPO) etc. are now participating in growth together. The market is neither sector specific nor segment (large cap, midcap etc.) This had happened briefly in the early 1990s only. This trend could actually be reflective of some structural changes in the economy per se. Of course an intensive research would be required to confirm this.

There does not appear to be froth in any pocket of the market. Though there may be cases of some individual stocks that are still in the process of normalization post the bubble burst.

The latest correction therefore could be a good opportunity to increase exposure to the Indian equities.

Last week, the National Statistical Office (NSO) released first advance estimates of the National Income for FY23. These estimates are important because the budget estimates for FY24 would be based on these estimates. The finance ministry will use these estimates to project the GDP, savings, tax revenue, expenditure and allocations for various sectors of the economy.

Some key highlights of the data released by NSO could be listed as follows:

FY23 real growth (2011-12 prices)

• GDP (at 2011-12 prices) may increase by 7% to against 8.7% in FY22. This estimate is marginally higher than the RBI’s latest estimate of 6.8%.
• Per capita GDP may increase by 5.8% to Rs1,13,967, in FY23, against a growth of 7.6% in FY22.
• Per capita private consumption may be Rs65,237, a growth of 6.6% over FY22.
• FY23 Nominal Growth (current prices)
• GDP may increase by 15.4% to US$3.3trn, against 19.5% growth in FY22.
• Per capita GDP may grow by 14.2% to Rs1,97,468 (US$2394), against a growth of 18.4% in FY22.
• Per capita private consumption may grow by 15.1% to Rs1,18,580 (US$1437) in FY23, against a growth of 16% in FY22

FY23 Sectoral growth (2011-12 prices)

• Agriculture growth may accelerate to 3.5% (FY22 – 3%)
• Manufacturing growth may collapse to 1.6% (FY22 – 9.9%)
• Mining growth to collapse to 2.4% (FY22 – 11.5%)
• Construction growth to slow down to 9.1% (FY22 – 11.5%)
• Public administration and Defence expenditure growth to slow down to 7.9% (FY22 – 12.6%)
• Electricity, gas, water and other utility services growth accelerate to 9% (FY22 – 7.5%)
• Trade, hotel, transport, communication etc. to grow faster at 13.7% (FY22 – 11.1%)
• Financial services, professional services and real estate to grow by 6.4% (FY 22 – 4.2%)

FY23 Production growth

·         Rice, cement, Oil & gas, steel, telephone subscriber, cargo at ports, air passengers, railways, exports, mining, manufactured products etc. may witness material slow down in growth.

·         Commercial vehicles, passenger vehicles, bank credit may witness higher yoy growth as compared to FY22.

Key observations

• The estimates are based on the data available till November 2022 and may go under significant revision when the first revised estimate for the full year will be released in May 2023. These estimates seem to assume sharp recovery in manufacturing and some slowdown in services in 2HFY23. However, it appears unlikely that the industrial growth will accelerate enough in 2HFY23 to achieve 4.5% real GDP growth in 2HFY23. The lagged impact of higher rates, tighter liquidity and slower global demand (exports) may actually be more pronounced in 2HFY23.
• These estimates may however allow the government to project buoyant tax revenue in FY24, and accordingly provide for higher government spending and improved fiscal position in the union budget to be presented on 1^st February.
• The NSO has projected a trade deficit of 4.6% of GDP for full year FY23 up from 2.5% in FY22. This is worrisome, as the exports are likely to slow down further in 2023 as the world struggles to avoid recession.
• Real per capita private consumption expenditure of Rs65,237 read with huge income inequality indicators, is inadequate to support self-reliance of citizens and higher growth. The pressure on the government to provide basic necessities like food, housing, education, healthcare etc. will only increase going forward. This will (i) constrict investment; (ii) hinder development of quality human resources; and (iii) lead to even more socio-economic inequalities.
• The good part is that buoyant growth may save the finance minister from making the unpleasant decision of hiking taxes.

It's less than two weeks into the new year and I have already faced multiple instances of ethical dilemma. These instances not only tested my resolve to avoid all kinds of ethical conflicts, but also raised doubts about the health of the Indian economy and sustainability of some new age business models.

Let me first briefly describe some of these instances:

·         I booked a doctor consultation for my daughter through a popular healthcare service portal. The doctor insisted that in future we should book consultation directly with the clinic instead of coming through the portal.

·         I lodged a service request for our out of warranty washing machine with the concerned German Appliance company. The service engineer visited within 3hrs and repaired the fault. While leaving he handed over his private business card and requested that in future we can call him directly; and he will charge only 50% of what the company charges for a service visit.

·         My wife booked a hairdresser visit from an aggregator. A young girl visited our home and did the job, While leaving she told my wife to note his personal mobile number. She said, “You can book an appointment through WhatsApp directly. It will cost you 40% less than the booking made through the aggregator.

·         I booked a cab for 8hrs through an aggregator for visiting a couple of places in NCR. The driver happened to be living within 2kms of my residence. After we completed the trip, he made an offer to me, “if you need to book a taxi for longer trips, you can call me directly and I will charge you a flat Rs15/km, instead of Rs23/km you have paid today.

In all these instances, the concerned service provider mentioned that “everyone” does this. The hairdresser girl and taxi driver referred by the respective aggregators Company and Service Engineer from German company even cited some of my neighbours who have availed their offers.

All these instances obviously involve a breach of contract as well as ethical impropriety. The dilemma however is that this gives me satisfaction of helping a service provider who is being apparently exploited by the aggregator; besides of course saving me money and some effort also.

If I overcome this ethical dilemma with the argument of “exploitation of poor service provider” and decide to engage with these service providers directly, then I would need to find answers to even more pertinent questions. For example—

(a)   Is the business model of most of these aggregators sustainable at all?

(b)   If doctors and engineers do not care about business ethics and the sanctity of contractual obligations, how could India dream of becoming a developed economy?

(c)    If the lower middle class service providers and middle class service users are both stressed enough to bypass ethics for some monetary savings, is the consumption growth story of India actually believable?

Joshimath is an important town in the Chamoli district of Uttarakhand, in the Garhwal Himalayas. It is the entry door to the sacred temple of Shri Badrinath; and also winter abode for the deity. It hosts the northern monastery (one of the four sacred Hindu monasteries established by Sri Adi Shankracharya); and a critical cantonment for the Army establishment posted to protect the northern borders with China (Tibet). It is also the gateway to famous winter sport venue Auli and several other Himalayan trekking destinations.

In the US, banking panic started at regional level in 1930, with many smaller regional banks faced crisis. However, as Great Britain decided to leave the gold standard for GBP on 21 September 1931, the panic spread throughout the country. Foreigners became concerned that the US may also follow Great Britain and end gold convertibility of USD. There was a rush to convert USD into gold. The collateral was that depositors became concerned about the safety of their money and started withdrawing currency from their accounts. A global rush to convert USD into gold and an internal rush to withdraw currency from banks drained out the banking system reserves and choked the money supply – exacerbating the deflation and propagating the great depression. There was a spate of bank failures in the US during 1931-1933.

The Federal Reserve Bank of New York responded to the situation by hiking rates in October 1931, to encourage investors to deposit money in the US banks or buy US bonds. There was an immediate relief, but that did not last long. The Fed started buying bonds from the market in 1932 and hiked the rates again in February 1933. It did not help much in restoring the confidence of investors in USD. In March 1933, the Federal Reserve Board suspended the gold standard for USD; President Roosevelt announced a national bank holiday and suspended all outbound gold shipments. The provisions that allowed the holders of specific treasury bonds to convert their bonds into gold were also revoked (many commentators have implied this action to be a sovereign default by the US).

1931 was the first year in recorded history of the US when both US Treasury Bonds and US Stocks yielded negative returns in the same year. The following two years marked a watershed in the history of the US financial system.

Bretton Wood agreement of 1944, established USD as the reserve currency of the world. The agreement, inter alia, provided that all the participating nations would allow free conversion of their own currencies into USD at all times; and the US will allow conversion of USD into gold at a fixed exchange rate of USD35 per troy ounce of gold. At that time the US manufactured over half of the total global production, as most of Europe and Japan lay shattered due to WWII. Obviously no one objected to the reserve currency status of the USD.

In the next 25yrs, Germany and Japan made substantial progress. The US share in global GDP fell from 35% to 27% during 1950-1969. The US participation in the Vietnam war (1964-1970) took a significant toll on the US economy. Besides, other political efforts like “Great Society” etc., also weakened the US economy. The “reserve USD” became highly overvalued, impacting US exports and causing a sharp rise in trade deficit. The US was forced to print more USD to keep its obligation under the Bretton Wood agreement. This led to a sharp decline in the gold coverage ratio of the USD. The inflation also shot up sharply.

To stem the run on US banks, the Fed had increased its key policy rate to 9.75% by October 1969.

1969 was the second time in recorded history of the US when both US Treasury Bonds and US Stocks yielded negative returns in the same year. Two years later, in August 1971, president Nixon unilaterally abandoned USD peg to gold, hence rescinding the 27yr old Bretton Wood agreement. For other participants in the agreement, it was a virtual default on the part of the US. However, the advent of “petro dollar” a few years later sustained the reserve currency status of USD.

Presently, the USD is arguably highly overvalued. The Fed is hiking rates and reducing money supply. Inflation is high. The economy is on the verge of recession. Trade deficit is rising. Fiscal deficit is at an unsustainable level. The US share in the global economy is shrinking. Large trade partners of the US, like China, OPEC, Japan, etc. are exploring non-USD trade with other trade partners. The US is incurring huge costs in the Ukraine war. And 2022 is the third time in history when both US treasury bonds and stocks have yielded a negative return in the same year.

If history rhymes, we could see some material developments in the US and, perhaps the global, financial system. A sharp USD devaluation, replacement (or supplement) of USD with a new digital currency, end of petrodollar regime (and hence reserve status of USD) are some of the wild guesses I could make.

 The Government of India has rolled out an integrated food security scheme effective from 1 January 2023. The new scheme shall remain effective till 31 December 2023. The scheme is estimated to cost the central government rupees two trillion. Under the scheme, the government would provide 5kg food grains per person to Priority Households (PHH) beneficiaries and 35 kg per household to Antyodaya Anna Yojana (AAY) beneficiaries, free of cost.

The scheme has apparently subsumed two extant food subsidy schemes of the central government, viz.,

(a)   Food Subsidy to Food Corporation of India (FCI) for discharge of obligations under The National Food Security Act, 2013 (NFSA). Under this scheme Under the scheme, 5 kg food grains per person is provided to Priority Households (PHH) beneficiaries and 35 kg per household to Antyodaya Anna Yojana (AAY) beneficiaries at a subsidized rate of Rs 3 per kg for rice, Rs 2 per kg for wheat, and Rs 1 per kg for coarse grain.

(b)   Food subsidy for decentralized procurement states, dealing with procurement, allocation and delivery of food grains to the states under NFSA, popularly known as the Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) started for 9 months in April 2020 to mitigate the effect of Covid pandemic on poor and extended twice thereafter. Under this scheme beneficiaries registered under the NFSA were provided an additional 5 kg of foodgrain per month for free.

This implies that by implementing the new integrated food security scheme:

(i)    The central government would save about Rs1.5 trillion on food subsidies in the calendar year 2023.

(ii)   The beneficiaries registered under NFSA would get free ration for one year; though the quantity of ration available will be less.

(iii)  The state governments who were claiming credit for free ration actually funded by the central government will not be able to do so.

The new scheme is thus a fiscally prudent and politically smart move by the central government. It has however evoked a variety of criticism. For example, the political opponents are criticizing the government that the very fact that over 81 crore still need subsidized or free food indicates the failure of the government's economic policies. The economic and financial market experts have criticized the government for failing in controlling subsidies. Their criticism is that the government is increasing subsidies which it will find politically inexpedient to unwind; and hence burden the future governments.

In my view, the criticism may not be fair, or, inter alia, the following reasons.

·         The National Food Security Act was enacted in 2013 by the UPA government, in recognition of the fact that the fundamental right to life enshrined in Article 21 of the Constitution includes the right to live dignity that essentially includes the right to food and other basic necessities. This in fact is a globally accepted good practice for welfare states.

·         The fact that 75% of the rural population and 50% of the urban population is entitled under NFSA to subsidized food does not necessarily imply that as many households cannot afford to buy food for their sustenance. This could just be a mechanism to compensate for poor minimum wage structure; faulty agriculture pricing mechanism; disproportionate indirect tax structure; and inadequate social infrastructure, especially health and education. Besides, this should be seen as a direct and effective wealth redistribution mechanism.

·         Number of people availing subsidized food cannot be a good measure of poverty.

·         The incumbent government has shown resolve in managing subsidies by not increasing fuel subsidy, despite political pressures, increasing fertilizer prices and imposing GST on common food items. Despite being a challenging year, the government is most likely to meet its budgeted fiscal deficit targets. Consequently, the Indian bond markets have shown remarkable stability, defying turmoil in the global bond markets.

·         The restructuring of food subsidy schemes could be the first step in the direction of further rationalization of food subsidy from 2024 onwards.

Overall, in my view, NFSA, like MNREGA, is a transformative legislation. This ensures a dignified life for over 800 million people; and thus provides stability and resilience to the economy. The government’s commitment to obligations under NFSA must be commended, not criticized.

Blackrock Investment

Key message

The Great Moderation, the four-decade period of largely stable activity and inflation, is behind us. The new regime of greater macro and market volatility is playing out. A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation. This keeps us tactically underweight developed market (DM) equities. We expect to turn more positive on risk assets at some point in 2023 – but we are not there yet. And when we get there, we don’t see the sustained bull markets of the past. That’s why a new investment playbook is needed.

Themes

1.    Pricing how much of the economic damage is already reflected in market pricing. Equity valuations don’t yet reflect the damage ahead. We will turn positive on equities when we think the damage is priced or our view of market risk sentiment changes.

2.    Rethinking bonds. We like short term government bonds and mortgage securities. Long-term government bonds won’t play their traditional role as portfolio diversifiers due to persistent inflation.

3.    Living with inflation. We see long-term drivers of the new regime such as aging workforces keeping inflation above pre-pandemic levels. We stay overweight inflation-linked bonds on both a tactical and strategic horizon as a result.

Credit Suisse

Key message and themes

·         Economy: We expect the Eurozone and UK to have slipped into recession, while China is in a growth recession. These economies should bottom out by mid-2023 and begin a weak, tentative recovery – a scenario that rests on the crucial assumption that the USA manages to avoid a recession. Economic growth will generally remain low in 2023 against the backdrop of tight monetary conditions and the ongoing reset of geopolitics.

·         Inflation is peaking in most countries as a result of decisive monetary policy action, and should eventually decline in 2023.

·         Bonds: With inflation likely to normalize in 2023, fixed income assets should become more attractive to hold and offer renewed diversification benefits in portfolios.

·         Equities: Markets are likely to first focus on the “higher rates for longer” theme, which should lead to a muted equity performance. We expect sectors and regions with stable earnings, low leverage and pricing power to fare better in this environment. Once we get closer to a pivot by central banks away from tight monetary policy, we would rotate toward interest-rate-sensitive sectors with a growth tilt.

·         Currencies: The USD looks set to remain supported going into 2023 thanks to a hawkish US Federal Reserve and increased fears of a global recession. It should stabilize eventually and later weaken once US monetary policy becomes less aggressive and growth risks abroad stabilize.

·         Commodities: In early 2023, demand for cyclical commodities may be soft, while elevated pressure in energy markets should help speed up Europe’s energy transition. Pullbacks in carbon prices could offer opportunities in the medium term, and we think the backdrop for gold should improve as policy normalization nears its end.

·         Real Estate: We expect the environment for real estate to become more challenging in 2023, as the asset class faces headwinds from both higher interest rates and weaker economic growth.

Morgan Stanley

Key message

Less growth, inflation, and policy tightening mean the US dollar peaks and high grade bonds and EM outperform. US stocks, HY, and metals lag. It's a good year for 'income' investing.

As growth/inflation slow and central banks pause, assets more sensitive to rate uncertainty will bottom first. EM > DM, bonds > stocks. Volatility lower. DXY peaks.

Themes

·         Europe goes into recession, China waits until spring to end Covid-zero, and the US barely skirts recession as housing activity plummets. The silver lining is that this weakness is short and shallow; global growth bottoms around March/April, and improves thereafter.

·         Both valuations and the cycle support a barbell of high-quality 'income' (high grade bonds, US defensive equities) with 'value' (EM stocks and bonds, EU banks/energy, Japan equities, EM tech/semis).

·         We expect the Fed and ECB to make their final hikes in January and March 2023, respectively, with the Fed cutting by 4Q23. Meanwhile, several large EM central banks, which were well out in front of their DM counterparts, start to ease materially. By end-2023, we forecast that policy rates decline by 275bp in Brazil, 250bp in Hungary, and 475bp in Chile.

·         In Asia/EM, we prefer Korea and Taiwan (for semis and hardware), as well as Japan, Saudi Arabia, and Brazil, and look for quality growth and small/mid-caps to take leadership after some momentum reversal. Stay defensive in the US via healthcare, utilities, and staples.

Fidelity International

Key message

Financial stability joins inflation and recession as a third pillar of risk. Aggressive Fed policy to control high inflation risks a severe recession and/or global financial instability, but overly tentative policy could allow inflation expectations to embed.

We maintain our base case for recession in 2023, first in Europe, then the US. Severity will be influenced by Fed policy, gas flows and fiscal response in Europe, and China’s recovery. We see a cyclical (shallow) recession in the US as most likely.

We believe structurally higher inflation resulting from the energy transition, demographics and reshoring will continue to be a key driving factor throughout 2023, even as supply chains ease.

Themes

Asset Allocation: Defensively positioned: underweight equities and credit, overweight government bonds and overweight cash. Prefer the safer haven of US equities to Europe. Neutral on the UK, Japan, EM.

Equities: Cautious on global equities. We are looking to invest in high quality stocks that are best placed to weather market volatility. Most bullish versus consensus in Asia Pacific ex Japan, particularly the Asean markets and India.

Fixed income: US and core Europe duration are relatively attractive, considering hard landing risks in both regions.

Real estate: We expect this Real Estate cycle to be shorter and shallower than previous cycles, due to greater transparency in the markets, so values will adjust quickly.

ING Bank

Key message

We expect to see several different shades of recession in 2023. We should get a rather textbook-style recession in the US with the central bank hiking rates until the real estate and labour markets start to weaken, inflation comes down, and the Fed can actually cut policy rates again. Expect a recession that feels but doesn’t read like a recession in China with Covid restrictions, a deflating real estate market and weakening global demand, bringing down economic activity to almost unprecedented low levels. And finally, look forward to an end to the typical cycle in the eurozone, where a mild recession will be followed by only very subdued growth, with a risk of a 'double dip', as the region has to shoulder many structural challenges and transitions. These transitions will first weigh on growth before, if successfully mastered, they can increase the bloc’s potential and actually add to growth again.

Themes

Inflation will continue to be one of the key themes of 2023. We expect it to come down quickly in America, given the very special characteristics of the US inflation basket, allowing the Fed to stop rate hikes and eventually even cut before the end of the year. In the eurozone, inflation could turn out to be stickier than the European Central Bank would like and also perhaps afford. Inflation in Asia will peak at the end of 2022, and while we're unlikely to see any significant recovery in the region's economies next year, currencies and risk assets should return to growth.

Commodities: This year has been extraordinary for commodity markets. Supply risks led to increased volatility and elevated prices. However, demand concerns have taken the driving seat as we approach year-end. Next year is set to be another year plagued by uncertainty, with plenty of volatility.

Global trade will continue to slow in 2023 amid economic headwinds. At the same time, trade patterns are changing and supply frictions persist in a volatile and more protectionist world. But transport costs of most overseas trade will be lower.

Business decisions will be shaped by the response to the energy crisis, weakening consumer demand and commitments to reduce carbon emissions in 2023.

Geopolitics continues to be an important driver for financial markets and the global economy. Watch out for Russia-Ukraine war; more territorial claims; and more political unrest.

BNP Paribas Asset Management

Key message

The global economy seems on an inevitable march towards recession. The causes are well-known: central banks aggressively raising policy rates to reduce inflation, an energy shock in Europe, and zero-Covid policies (ZCP) and a shaky property market in China.

Much of Europe is already in recession. We expect one to begin in the US in the third quarter of 2023, and while China’s growth will likely not turn negative, it will be below historic levels.

One can easily think of ways in which the situation could yet worsen: a breakdown in a key financial market due to the rapid rise in interest rates, a cold winter and blackouts in Europe, or a flare-up in geopolitical tensions between the US and China.

J. P. Morgan Asset Management

Key message

As we look to 2023 the most important question is actually quite straightforward: will inflation start to behave as economic activity slows? If so, central banks will stop raising rates, and recessions, where they occur, will likely be modest. If inflation does not start to slow, we are looking at an uglier scenario.

Fortunately, we believe there are already convincing signs that inflationary pressures are moderating and will continue to do so in 2023.

Themes

·         Inflation panic subsides, central banks pause.

·         Recession to be modest.

Robeco Asset Management

Key message

in our base case, 2023 will be a recession year that – once the three peaks (inflation, rates, USD) have been reached – will ultimately contribute to a considerable brightening of the return outlook for major asset classes.

The last leg of a steep climb towards the peak can prove treacherous and markets tend to overshoot here. That implies short-term pain as exhaustion and capitulation take hold, following an already dismal performance across the multi-asset spectrum. While cash levels among retail investors are historically elevated and professional investors are moving towards a consensus of a US recession in 2023, we haven’t seen full capitulation in risky assets yet.

Moreover, as often in deep bear markets, countertrend rallies last longer. This time they’re fueled by the ‘bad news is good news’ mantra that took hold in the era of quantitative easing. We expect the last leg of the bear market cycle to emerge in 2023. This will bring the dislocation in assets that will deliver long-term gain, given the asymmetric risk-reward pay-off that will emerge.

Invesco Asset Management

Key message and themes

2023 will be a year of transition from a contraction regime to one of recovery. We reduce the defensiveness of our Model Asset Allocation, while keeping some powder dry for when recovery is confirmed. We are reducing the government bond allocation to Neutral, while increasing the allocation to high yield (to Overweight). We also reduce the cash allocation to zero, replacing it as diversifier of choice with an Overweight allocation to gold. From a regional perspective EM and US are preferred.

Top ideas Japan equities, EM real estate, US HY, Gold