As the economy slows, an epic climb in short-dated rates and bond yields appears to have shocked investors into accepting the prospect of stickier inflation, but they still seem reluctant to price for substantially lower earnings.

The Asset Allocation Committee (“the AAC” or “the Committee”) has thought for some time that markets were over-optimistic on both inflation and corporate earnings. An epic climb in short-dated rates and bond yields appears to have shocked investors into accepting the prospect of stickier inflation, but many still seem reluctant to price for substantially lower earnings. We see fixed income markets offering yield again at last, but we anticipate further volatility not only for risky assets but potentially for government bonds, too, as conditions tighten further. Diversification and managing risks are our watchwords.

INTEREST RATES: FROM HISTORIC LOWS TO A 14-YEAR HIGH IN A MATTER OF MONTHS

Average of global short interest rates (basis points)

AAC 4Q22 2 Pager - Tighter Conditions Begin to Squeeze the Economy 

Source: Evercore ISI. As of September 21, 2022. The chart shows three-month market rates for the U.S., U.K., Eurozone, Japan, Canada and Australia (65%, GDP-weighted) and for India, China, HK, Korea, Taiwan, Indonesia, Malaysia, Philippines, Singapore, Thailand, Brazil, Mexico, Argentina, Poland, Czech Republic and Hungary (35%, equally weighted within regional sub-categories that are then GDP-weighted). For illustrative purposes only. Nothing herein constitutes a prediction or projection of future events or future market behavior. Due to a variety of factors, actual events or market behavior may differ significantly from any views expressed. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Equity

  • The AAC maintained its underweight view.
  • Earnings outlooks have barely moved, and we believe they will be revised downward meaningfully over the coming months.
  • The AAC continues to favor lower beta, defensive equity exposure; value over growth, with a defensive tilt via high-quality, income-oriented stocks; and the U.S. over emerging markets.

Fixed Income

  • The AAC maintained its overweight view on investment grade and its neutral view on high yield; the AAC downgraded its view on emerging markets debt from neutral to underweight.
  • The AAC notes the yield now available in fixed income markets, but continues to favor the highest-quality issuers.
  • We remain neutral in our view of high yield as an asset class, but we do have a favorable view on high-quality issuers; our view has become more positive on quality high yield versus equities, on relative valuation and as a way to maintain risk exposure while investing higher in capital structures.
  • We think global risks and dollar strength outweigh the higher yields now available in emerging markets.

Real and Alternative Assets

  • The AAC maintained its overweight view on Hedged Strategies, for diversification and because a higher volatility environment is likely to favor macro, trading and option-writing strategies.
  • The AAC downgraded its view on commodities from strong overweight to overweight: while the AAC remains strongly positive about the supply side, we see recession risks building around the demand side.
  • The AAC downgraded its view on private debt from overweight to neutral as publicly traded bond yields rise and dispersion of potential outcomes across private credit markets widen.

Market Views: Based on 12-Month Outlook for Each Asset Class

AAC 4Q22 2 Pager - Tighter Conditions Begin to Squeeze the Economy 

As of 4Q 2022. Views shown reflect near-term tactical asset allocation views and are based on a hypothetical reference portfolio. Nothing herein constitutes a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. See disclosures at the end of this publication, which include additional information regarding the Asset Allocation Committee and the views expressed.

About the Asset Allocation Committee

Neuberger Berman’s Asset Allocation Committee meets every quarter to poll its members on their outlook for the next 12 months on each of the asset classes noted and, through debate and discussion, to refine our market outlook. The panel covers the gamut of investments and markets, bringing together diverse industry knowledge, with an average of 30 years of experience.