Inflationary pressures have persisted beyond initial market expectations, forcing a protracted monetary policy tightening cycle.
The shock of aggressive interest rate hikes following a prolonged period of record-low settings, however, is threatening to tip the global economy into recession.
According to global investment manager Robeco, this dynamic hinders long-term bond positioning and favours short-term speculation.
“Markets are stuck between a stubborn inflation environment and a pending recession. These are interconnected,” Robeco noted in its latest credit quarterly outlook report.
“To kill the inflation monster, central banks almost have to force the economy into a recession to cool off labour markets.
“The time lags between central bank action and impact make it virtually impossible to avoid over- or undershooting.”
Robeco said it would continue to “buy the dip” in the current phase of the business cycle, but added its strategy would be underpinned by the “discipline to take some risk off the table”.
This includes reducing its positions on additional tier 1 (AT1) bonds to 3 per cent and removing its swap spread position after increasing exposure earlier this year.
“With no immediate catalyst on the horizon, we decided to close the position,” Robeco noted.
“We still like the level of swap spreads in Europe, but from here we prefer to play this via AAA-rated bonds like agencies and covered bonds.”
Meanwhile, in a separate report, Robeco flagged a “long-term opportunity” in Asia-Pacific equities, given “low absolute and relative valuations” impacted by geopolitical and interest rate concerns.
“The last time Asia was this cheap, fiscal and monetary policy was a lot weaker than now, yet subsequent market outperformance was dramatic,” Robeco’s head of Asia-Pacific equities, Joshua Crabb, said.
“...The long-term structural foundations of the Asia-Pacific region will assert themselves over time, making it an opportune time to invest in Asia-Pacific ahead of the next era of growth,” he said.
Additionally, Asia-Pacific economies are not subject to the same inflationary pressures felt across the United States and Europe.
“This is giving governments in the region policy flexibility and supports the view that macro fundamentals will start to be reflected in relative equity valuations,” he added.
The International Monetary Fund (IMF) is projecting a strong economic rebound in the Asia-Pacific’s largest economies, China and India.
The Chinese economy is tipped to grow 5.2 per cent in 2023 and 4.5 per cent in 2024, while the Indian economy is expected to expand 5.9 per cent and 6.3 per cent, respectively.
