Four investing themes to watch and five tips for playing rotations including a focus on China

• Amundi said markets shifting focus to growth with more optimism for China and emerging markets
• Expectations of a less hawkish US Federal Reserve support tech stocks with Nasdaq rallying in January
• Amundi thinks four themes will be crucial going forward and  investors should play rotations 

One of the biggest global asset managers European-based Amundi has four investing themes it reckons will be crucial going forward and said markets are shifting focus away from inflation towards growth, with a slightly less disruptive economic picture for Europe and a more optimistic view on China.

Amundi thinks the shift is seeing a visible trend towards the outperformances for China and emerging markets (EM) followed by a big reversal in the US dollar’s strength.

In the latest Amundi Global Investment Views group chief investment officer Vincent Mortier said intra-market rotations also materialised, with cyclical stocks favoured over defensive names in Europe while expectations of a less aggressive US Federal Reserve support tech stocks.

The tech-heavy Nasdaq rose more than 11% in January, the most since July as global markets rallied in a strong start to 2023.

 

Four investing themes crucial going forward in 2023

Mortier said the four investing themes include:

1. Inflation/growth balance
2. Central bank actions
3. US dollar weakening
4. Corporate earnings trajectory.

He said any negative growth and earnings surprise could drive markets lower while there are no short-term triggers for upside at current valuation levels.

Five tips for investors to play rotations

Mortier said the four investing themes call for a defensive allocation and investors should play rotations but has five tips for investors in doing so.

 

1. Maintain a cautious risk stance, but recalibrate regional preferences

“We are now more constructive on Chinese equities than on developed markets (DM), regarding which we are cautious and more in line with market capitalisation, reducing negative stance on Europe equity,” Mortier said.

“From a cross-asset perspective, we are slightly positive on duration as we believe government bonds are maintaining their portfolio protection advantages.

“We are becoming more cautious in high yield credit while we also keep a focus on diversification through commodities such as oil and gold.”

 

2. Active duration management key in fixed income

Mortier said inflation and policy rate expectations are manifesting the fastest in bond yields, which have seen a downward move, supporting its slight positive view on US duration and a marginally cautious stance in core Europe.

“While near-term concerns on growth should be constructive, we do not recommend taking this for granted because inflation is still high,” he said.

“Corporate bonds are determined to address inflation, particularly the sticky services inflation, and this warrants an active stance.

“On the other hand, the  BoJ (Bank of Japan) is likely to exit its negative rates policy following an upward revision to its 2023 inflation forecasts, making us now cautious on Japanese government bonds.

 

3. In ‘bonds are back’ mantra, play credit with selective approach

“The effect of monetary tightening on corporate credit has been limited so far because of limited refinancing needs and the high use of internal cash, ” Mortier said.

“While the latter has supported spreads so far, it has also caused a deterioration in liquidity compared with a year ago, especially for CCC-rated issuers, ” he said.

“Looking ahead, the effect of rising rates and low economic growth will be felt more by low-rated HY (high yield) issuers.”

Mortier said as a result, Amundi continues to prefer investment grade over high yield.

“He said European IG spreads are cheaper versus historical levels, whereas this is not true for US IG,” he said

 

4. Focus on earnings resilience at the single-company level for developed markets (DM) equities

Mortier said revisions on the macroeconomic front and the currency dynamics call for a more cautious stance in the US and Japan while improvements in the European economic outlook support a less negative view on the region.

“However, the positive scenario factored in by markets could easily turn sour due to geopolitical risks or more-hawkish-than-expected CBs,” he said.

“It’s also worth noting that often the beginning of the year does not prove a good indication of returns for the rest of the year.”

He said the current earnings season should present a clearer picture.

 

5.Opportunities in emerging markets, starting with China.

“China continued its fast-track economic reopening and is supporting its housing market, leading us to stay constructive as we have also upgraded our growth outlook for the country,” Mortier said.

“This could have a positive trickle-down effect on countries with strong trade ties to China.”

He said emerging debt, the USD trend, the emerging markets-developed markets economic growth differential, and valuations are among the key drivers of sentiment.

“Overall, we are entering a riskier phase as markets reassess the earnings outlook which could cause some areas of the market to correct while some opportunities to add risk could emerge in the next few weeks,” he said.

“Importantly, we could see an earnings recession even in a ‘soft landing’ economic scenario.

“Hence, agility is key at this stage, but with a cautious tilt for now.”

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