Lower rates typically mean lower bond yields, and those help the investment case for “growth stocks”, which are typically defined as companies that will earn the bulk of their revenues in the future, rather than in the short-term.
If bond yields are lower, then that increases the attractiveness of future revenue from equities.
Beauchamp said one of the effects of the recent spike in bond yields has been to send technology shares down, and in particular the shares of many of the companies associated with artificial intelligence, as these companies may be further away from those future revenues than more established technology businesses, and so are more acutely impacted.
Nadège Dufossé, global head of multi-asset at Candriam, is a little more positive on the global economy, but still believes rates will remain higher for longer, while global growth will be below the average levels achieved in the decade prior to the pandemic.
With this in mind, she said her view is that general investor sentiment towards equities has improved this year, and this means markets are entering a period of possible economic stress at a time when valuations are not especially cheap, and so, in her view equities are a particularly high risk investment right now.
Shamik Dhar, chief economist at BNY Mellon Investment Management is also planning for a downturn.
He says some investors are embracing an optimistic strategy which some commentators have called “immaculate disinflation”, a scenario where central bank policy causes inflation to fall, without growth also declining.
Dhar says: “By our estimates, recession risk remains material and is higher than what the markets are pricing in.
"While ‘recession fatigue’ from a downturn that never seems to arrive is understandable, this fatigue is not an excuse to abandon the data and adopt an investment strategy of hope. Therefore, we position to get ahead of recession impacts, rather than hope for immaculate disinflation.”
When it comes to equity allocations, his view is that while caution should prevail, he sees a greater possibility of the US achieving something close to the immaculate disinflation narrative, which would be supportive for equity markets, while he also believes the US equity market can be the beneficiary longer-term from artificial intelligence.
When it comes to fixed income exposure, he says he favours long duration bonds, the traditional asset class to own if one anticipates a recession, long duration bonds.
He says it may be too early to own such bonds right now but he views the risk of being too late to go into long duration as exceeding the risks of being too early, and for this reason he is focusing there, while also minimising credit risk.
