Multi-Asset Trends To Watch

By Caglasu Altunkopru

Transcript

Caglasu Altunkopru: As we think about this year, I think one of the things that we need to be mindful of is this idea of this is still an economic environment that is still under pressure from exceptionally fast tightening and monetary policy.

So, this year we've seen not only the supply chain distresses ease, but also a normalization process in the inventories that sort of came along with that. So if you put those things together, you actually have an environment that where we're sort of seeing growth start to improve from depressed levels - you start to see that come through in confidence.

Given our sort of relatively sanguine view on growth prospects, we're not quite constructive on rates just yet, but we do think, as we go forward in time, and as inflation forces normalize, sovereign bonds will become an increasingly good diversifier to equity investments. So what we're looking for, again, if our baseline scenario plays out, we're looking to add to our duration exposure as increasing a hedge to our equity exposure.

So with equities, we've started to increasingly become more constructive. On the corporate margins side, if you think about last year, last year was a phenomenal year in terms of nominal growth for corporates, but earnings suffered because margins were compressing. Corporates were having a difficult time trying to match output prices with input prices.

So now, this year, as supply chain pressures ease, we're seeing those issues no longer will be relevant. And we've actually seen the impact of this come through in the margins.

So in the goods sector, you see increasing signs that output prices are catching up to input prices. And that's happening while headline inflation is fading, which is phenomenal. At the same time, you're seeing inventories start to normalize.

If we think about the service sector instead of the goods sector, in the service sector, you know, if you think about the past couple of years, companies had a massive drag from lack of operating margin.

So now as that service economy has rebounded right back, you're seeing these companies not only experience increased pricing power, but also better economies, in terms of being able to distribute those fixed costs and therefore margins are improving as a result.

So as we think about earnings for '23, we're basically seeing, even if you have sort of like a trend-like, or below-trend, growth, with the boost from improving margins, we can actually see a reasonable year for equity earnings growth. Which is actually a big change from what we saw last year, which was basically very strong nominal growth paired with fairly lackluster earnings.

We're leaning more toward the more secular growth ideas. In the factor space, this would be growth. In around sectors, this would be sort of like more technology-oriented areas, even though they have had a good run over the past couple of months.

Our expectation is that technology will do well over the next few quarters because we expect to be in a relatively slow growth environment. And we would be cautious about entering some of the more sort of procyclical variants like financials and energy.

Having said that, in an environment where we've seen these massive unwinds of commodity pressures, we've seen consumer discretionary benefit from the unwinding of those pressures. And again, this we believe is maybe somewhat underappreciated and would look to those areas for exposure over the next couple of quarters.

Thinking about commercial real estate, one has to realize that office is only one portion and that's really the one area that's under distress. One has to recognize that occupancy rates for office space have not quite come back to pre-pandemic levels.

Elsewhere, however, the sector is doing remarkably well. So if you think about hotels, residential, warehousing and storage, or even sort of biology parks, they have held up to pre-pandemic levels. And those areas we don't see elements of distress.

So what I would say is, some of these signs of distress that we're seeing in commercial real estate markets are really reflecting secular headwinds as opposed to the distress from elevated interest rates.

Having said this, so even though rates haven't come down, just the fact that we have greater visibility in the rate space - mortgage rates have stabilized over the past few months - you are starting to see that come through in improved activity in residential real estate.

The views expressed herein do not constitute research, investment advice or trade recommendations and do not necessarily represent the views of all AB portfolio-management teams. Views are subject to revision over time.

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