Global financial markets are entering a riskier phase where some corporate earnings could disappoint while opportunities remain in China, emerging markets and investment grade bonds, Europe’s biggest asset manager Amundi said.
In their February note to investors, Amundi’s group chief investment officer Vincent Mortier and deputy group CIO Matteo Germano spoke of a subdued earnings and economic backdrop that calls for a cautious, well-diversified approach.
“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,” their note 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.”
With nearly two trillion euros in assets under management, Amundi is Europe’s largest fund manager. Its recommendations are widely watched in the investment community.
‘Strong rotations’
Markets are experiencing “strong rotations,” it said, as focus shifts away from inflation towards growth, with a slightly less disruptive economic picture for Europe and a more optimistic view on China. Outperformances for China and emerging market were the most visible trends, followed by the big reversal in the dollar’s strength, Amundi noted. Intra-market rotations also materialised, with cyclical stocks favoured over defensive names in Europe while in the US, expectations of a less aggressive Fed supported tech stocks.
Looking ahead, Mortier and Germano identified four key themes: the inflation/growth balance; central bank actions; dollar weakening; and the corporate earnings trajectory. “Any negative growth and earnings surprise could drive markets lower while there are no short-term triggers for upside at current valuation levels,” they said, adding that this calls for a defensive allocation.
To play that rotation, investors, in Amundi’s view, need to maintain a cautious risk stance, but recalibrate regional preferences in favour of Chinese stocks when compared to developed markets. Amundi also believes government bonds are maintaining their portfolio protection advantages.
‘Bonds are back’ remains Amundi mantra
Fixed income investments require active duration management as central banks should not be underestimated, the firm said. “While near-term concerns on growth should be constructive, we do not recommend taking this for granted because inflation is still high,” it said, referring to the Federal Reserve and the ECB. Amundi said it has become cautious on Japanese bonds now that the Bank of Japan is likely to exit its negative rates policy.
Mortier, who last September said it’s time to love bonds again, still believes in the “bonds are back” mantra, according to the Amundi note, and recommends investors play credit with a 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,” the note said, adding that while the latter has supported spreads so far, it has also caused a deterioration in liquidity compared with a year ago, especially for low-rated CCC-rated issuers.
Looking ahead, “the effect of rising rates and low economic growth will be felt more by low-rated high yield issuers,” it said. “As a result, we continue to prefer investment grade over high yield.”
Resilience can easily turn sour
Addressing developed market equities, “investors should focus more on earnings resilience at the single-company level,” Amundi recommended. “The positive scenario factored in by markets could easily turn sour due to geopolitical risks or more-hawkish-than-expected central banks. 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. The current earnings season should present a clearer picture” for the first half of the year.
Amundi sees opportunities in emerging markets, thanks to 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,” it said. “This could have a positive trickle-down effect on countries with strong trade ties to China.”