Market GPS June 2023
Investors came into the year grappling with two big questions:
Would the turmoil of 2022 subside and give way to calmer markets in 2023?
And – after the historic rate hikes – when will the central banks pivot?
No one knows the answers, at least not yet.
But we think the most important pivot is actually going to be the pivot in portfolios, from defense to offense.
Right now, the global economy is certainly late in the cycle and being late in the cycle suggests a downturn looms. This is when investors typically turn defensive.
But with the challenges for the global economy so well telegraphed – and maybe priced in – we think investors might be looking for that pivot to offense sooner than they had imagined back at the beginning of this year.
So, what does this mix of defense and offense mean for different asset classes?
Let’s start with equities.
For equities, we believe quality matters more than ever, and that active management will be key in order to focus on sound balance sheets and stable cash flows. And, yes, we still expect ongoing volatility as higher rates and inflation work through the economy.
George:
“It means the cost of money, the cost of capital will be higher going forward. You'll want to look at inflation protected assets, whether those are equities that will grow with inflation or inflation protected assets that are real or of a fixed nature or growing nature.”
Adam:
And volatility presents opportunities to mix defense and offense.
On defense, healthcare and biotech remain very attractive in a late cycle economy, and Europe’s lower valuations provide a potential margin of safety against an earnings slowdown.
On offense, technology companies are already showing a greater divergence between the winners and losers. And when signs of a broader recovery do come through, we’ll expect profitable small- and mid-cap companies to outperform the broader market. And also for Europe’s cyclicality to be a valuable tailwind.
In fixed income, investors could benefit from taking what the market is offering – a defensive, investment-grade core bond portfolio with yields at levels we have not seen in years.
Short-duration bonds are offering mid-single-digit current yields, while intermediate-duration bonds offer mid-single-digit current yields plus the potential for meaningful capital appreciation if rates should fall from current levels.
Within credit, yields are even higher – and here we’re focused on resilient investment-grade businesses that are more likely to weather a downturn than their more cyclically exposed counterparts.
Jim:
“I'm encouraged by the fact that today we have bond yields that are much higher than they have been historically or at least in the last decade…Bonds actually make sense. You can include them for diversification. You can include them for income, and you can now kind of vary the amount of risk and return that you want in a lot of different bond solutions to get yields that are actually very attractive.”
Adam:
Last, we’re also focusing on liquid alternative strategies to help weather this environment. They play defense when their typically uncorrelated returns provide the potential to limit losses and reduce overall volatility, and at the same time they can play offense when performance dispersions are created in these environments.
Janus Henderson is here to help you position for these market trends and investment opportunities ahead. As the global economy resets, we believe nimble investors, including those willing to deviate from their benchmark, will make the most of the opportunity to pivot their portfolios from defense to offense.
