De-escalation
Global big tech, with an emphasis on companies with pricing power, is the go-to for Singapore-based DBS Bank Ltd., which sees the world returning to “inflationary growth”—a scenario it sees as positive for stocks broadly. Like many investors, however, DBS is underweight on European equities because the region will take time to resolve its energy reliance on Ukraine and Russia.
Short-dated bonds look more attractive relative to long end, according to BlackRock Investment Institute, as central banks will learn to live with moderate supply-driven inflation, rather than taking policy rates into restrictive territory.
“We expect the sum total of rate hikes to be historically low given the level of inflation,” wrote BII analysts led by head of macro research Elga Bartsch. They also favor U.S. and Japanese equities over credit.
Chinese stocks are also favored positions for both DBS and BII, given the likelihood of easier policy as other central banks tighten, though BII warned “China’s ties to Russia have created a geopolitical stigma risk that could pressure some investors to avoid Chinese assets.”
Sanctions and Commodities
“Even if sanctions were lifted tomorrow, Russia’s traditional clients would be looking to diversify their suppliers,” said Barings’ chief global strategist Christopher Smart. “Prices are set for more gyrations even as they likely drift higher.”
Barings likes commodity-linked currencies, and is avoiding net importers.
Among BlueBay’s favorites are the Australian dollar and South African rand, while the Indian rupee and the Turkish lira are among their picks for currencies to play on the short side.
Stagflation, Recession
Not many discussed this 1970s-style scenario, but Goldman Sachs laid out recommendations for this situation. Increasingly cheap hedges against global stagflation include long positions in the U.S. dollar versus the Swiss franc or euro, according to Goldman Sachs’ strategist Ian Tomb.
In the event that stocks and bonds slide in tandem, Tomb favors backing the Japanese yen versus the dollar. It’s a tough call as yield differentials have seen the yen plummet to a six-year low versus the greenback, but Tomb’s analysis suggests it’s still “an excellent hedge when both risk assets and core rates fall.”
Israel’s shekel is also likely to weaken versus the dollar in this scenario, in Tomb’s view, given its correlation to technology stocks. So, a short position is a cheap hedge against recession risk or a selloff in core government bonds, he says.
--With assistance from Ishika Mookerjee.
This article was provided by Bloomberg News.