Economy
China's reopening is much more positive for the Chinese economy than it is for the rest of the world, as it will boost its domestic service sector activity and consumer spending much more than the industrial economy. A slowdown in Chinese industrial activity will put downward pressure on its demand for raw materials and energy, helping the world avoid another spike in inflation. Upgrade Macau casinos to overweight as the key beneficiaries of reopening. Off-shore TMT and bank shares face structural headwinds.
In this Strategy Insight, we assess the best and worst opportunities for inflation-linked bonds within the major developed markets. We see a case for underweighting inflation protection in the euro area, while overweighting Japanese inflation-linked bonds with the Bank of Japan moving away from yield curve control at a time of relatively high Japanese inflation.
In response to lower energy prices and China’s reopening, European assets prices are outperforming. Will the ECB spoil the party?
In this week’s report, we look at whether global growth conditions remain conducive for a continued decline in the dollar. Our findings are mixed, while there are some economic green shoots, the overall growth picture remains weak. This argues for some consolidation of dollar losses in the near term.
While the housing downturn will be fairly mild in the US, it will be more severe abroad. Continue to favor bonds of countries whose housing fundamentals will limit rate hikes.
We measure the effects of inflation and growth cycles on the returns of various assets using the four-quadrant approach, where we classify periods into the following buckets: Slowing inflation/slowing growth (slowdown), rising growth/slowing inflation (goldilocks), rising growth/rising inflation (overheating), and slowing growth/rising inflation (stagflation). Our analysis provides insight into the coming macro environment. As growth and inflation begin to decline, the best choices for asset allocators will be fixed income, precious metals, CTAs and timberland.