Main trends
Aging population - In more developed countries, the labor force is shrinking and the number of older people is increasing, opening up new opportunities in the healthcare sector and hospital services. The reduction in labor will result in a reduction in production unless technology helps to bridge the gap. It will also weigh on the pension systems of some countries like Italy, where the situation will become unbearable and they will be much more reliant on immigrants.
AI - Since the launch of ChatGPT, the world has been filled with this world in every context. It will impact all industries, but we're not sure when. Many investors are already discounting any future AI-related improvements in some stocks, but it's not certain we'll see an obvious shift in the short-term. There is a high probability that AI could increase productivity in most industries, but it will also come at the expense of some workers who lose their jobs only to re-enter the labor market after some time. There will be many opportunities to invest in both direct AI developers and users and materials required for processing units.
Financial credit tightening - With the new regulations of Basel IV, banks are required to reduce even more risks and hold higher capital reserves. Having seen what has happened to some regional banks in the US, we believe that it will become increasingly difficult to borrow money from banks, also due to longer-term higher interest rates. This will pave the way for the proliferation of private lenders.
Recession - We should not relax because we have seen a decreasing inflation in the last months since the 2M10Y curve is still inverted. We are still expecting at least one rate hike in the US and two in the Euro-area, but it could be even worse if there is no signal of the economy slowing down. One positive data is the payroll growth in the US, which is lower than expected and could keep a dovish Central Bank. We believe that rate cuts will not begin before Q3 2023, unless the economy is suffering too much (for example a recession, which is very likely at the moment and could be triggered by the CRE bubble). We avoided the inflectionist spiral driven by the expectations, which has always been positive, however we believe it is too optimistic and it is not fully pricing a recession. Different case is the UK, which has seen higher inflation and has really high probabilities of suffering from inflation and interest rates in the long run, since loans are mostly issued at variable rates, this will contract the income available for the next 20-24 months.
Investment opportunities
Fixed Income - We remain neutral on developed market fixed income, preferring to focus on some short dated government bonds or even some emerging market local currency government bonds, while keeping in mind all the risks involved. US and EU IG corporate bonds offer really attractive yields without taking on huge risks.
Equities - We prefer a slightly underweight position on DM equities, we prefer focusing on the financial sector (avoiding banks exposed to CRE), which should see an increase in revenue, due to the higher rates, the energy sector, with oil prices that should rise around 10-15% in the next months, and we still see travel as a solid business, with some major airlines and accommodation companies. Be cautious with tech stocks, avoid P/E which are already too high. For EM we would stay slightly overweight in China and India.
Private Markets - Private equity should remain slightly underweight given the looming recession, while private credit should be overweight as opportunities are plentiful as financing conditions tighten.
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