Risk assets were ‘over-sold’ into year-end as investors panicked that the global economy was on the brink of recession.
As in early 2016, peak pessimism on global growth coincided with the US Federal Reserve (Fed) signalling a delay in further rate hikes and policy stimulus by Beijing.
Risk premiums are still relatively elevated in our opinion, despite the retracement of much of the December sell-off in the first weeks of January. But for the rally in risk markets to be sustained, the flow of corporate earnings and economic data must imply stabilisation. And an escalation, rather than the expected truce, in the US-Sino trade war remains a key downside risk.
The deceleration in growth expectations is more pronounced for developed than emerging economies and with the Fed on ‘pause’, the backdrop is supportive for emerging market (EM) assets to outperform.
In our multi-asset credit strategies, exposure to EM debt has been raised, notably local currency debt.