Florian Ielpo, head of macro at Lombard Odier Investment Management, agreed, saying the Fed’s medicine is “clearly working”.
“An essential point to understand today is how markets do not need to see a complete roll-over of central banks’ policies for duration to start rewarding investors again,” he said.
A stabilization of expectations is enough for longer term rates to stop rising, while showing today a largely improved carry, he added.
“Bonds’ downside risk has now moderated significantly, and it looks incredibly tempting to now call for the end of bonds’ negative momentum effect.
“Time to load on bonds again – but which bonds?”
Should the current slowdown become a recession, government bonds would look attractive again he said.
“However, we believe that a hard-landing-recession is not a given, and while investors should be prepared for it, they should also plan for a more positive scenario.”
That is when corporate bonds come into question, he said.
“With recession risk rising as a consequence of monetary policy, spreads could increase but would be countered by dropping government rates.
“Stronger initial corporate fundamentals, better maturity distributions and the relatively robust position of banks have diminished the left tail for corporate credit risk. In short, the potential for widening spreads is more contained than before.”
Finally, the outlook for equity markets in 2023 looks very different from the one investors have experienced over the past 10 years, Flood said.
“We expect a change in leadership to favour end markets which benefit from the increased spending on the build out of low carbon technologies such as renewables, grid investment and energy efficiency.
“For investors, this also means being more active as beneficiaries of this structural growth opportunity are likely to be industrial and automation companies which, unlike the technology bull market of the last decade, are more cyclical in nature.”
If 2022 was the beginnings of a change in regime, and forewarning of what lies ahead, then it is welcomed, Flood said.
“[This is a] market that offers more opportunity for active managers to excel, and we see far more rational valuations today than the elevated valuations and paltry returns on offer in more recent times.
“In 2023, we are likely to see better opportunities to add value as an active investor and look forward to investing in a more rational, normalised world.”
sally.hickey@ft.com
