Is there life beyond bonds?

Is there life beyond bonds? This is the question that is haunting experts and practitioners busy making predictions on inflation and growth for this year-end and for the whole of 2024 at a time when the market is characterized by persistent inflationary pressures and fears about a possible recession.

Also in response to this question, Banca Generali brought together the world's leading asset management companies around a table to discuss the view of the coming months and possible winning strategies.

It emerged that persistent inflationary pressures will cause central banks to hold the restrictive line for a long time to come. This is a radical change of course from the modest interest rate environment in place before the pandemic.

Volatility in the coming months will remain important, and according to leading market observers over the next 6-12 months markets will be influenced mainly by inflation and monetary policies, while China and geopolitical tensions will remain slightly in the background.

Market participants, polled in an ad hoc survey proposed to them by Banca Generali, are convinced that central banks may resume an expansionary cycle certainly not before the first half of 2024. Few see a recession in Europe, while most expect soft lending in both the U.S. and the Old Continent.

The private bank agrees with traders' view about the soft lending outlook that awaits the US and Europe in the coming months.

In contrast to the survey's findings, for the institution led by CEO Gian Maria Mossa, geopolitics will remain front and center, and special observed will once again be China grappling with a cyclical but also structural crisis. It also thinks inflation is falling with moderate downward trajectories and sees rates near the peak.

Traders polled on which macro asset class they prefer to invest in the next six months mostly focused on bonds, but the positive surprise is that equity follows closely, while few mentioned short-term instruments as an option.

The opportunity to lengthen portfolio duration will happen soon: according to the vast majority of respondents as early as the next six months.

The bond segments with the greatest potential for performance in the next 6-12 months are emerging government bonds, followed by non-Euro government bonds and investment grade corporate bonds.

What about stocks? Experts are convinced that current valuations are sustainable. The preferred areas for equity investment in the next 6-12 months are the United States, followed by Emerging Countries and Japan in third position. Banca Generali's view does not diverge: the Lion reality is convinced that bonds are on the first step of the podium at this stage and maintains a particular focus on 3/5-year government bonds and emerging markets.

On the equity side, it believes that prices are sustainable and anticipates a decisive disruption brought by Artificial Intelligence: the first six months of 2023, on the other hand, have seen tech stocks put in a significant rally, driven mainly by the generative artificial intelligence theme, which has pushed the valuations of some mega caps to reach high multiples. Artificial intelligence, experts say, will boost productivity and corporate profits, but some warn of a possible new bubble.

Good. So how to behave in this environment that remains changeable and volatile?
There is no denying that today bonds are back to attractive yield levels again and the potential is good, not to mention that they are an opportunity for diversification, especially in times of economic uncertainty.

But to focus only on this asset class would be limiting reason why the industry would like to give the average investor who has historically and culturally little equity in his or her portfolio, dislikes risk, and often takes refuge in bonds as a safe haven partly out of fear or laziness. Finally, so-called liquid alternative strategies, representing a de-correlated asset class compared to traditional strategies, if included proportionately in portfolios, always allow for optimizing levels of risk and return.

In general, experts confirm the importance of active management, which allows for timely reaction to the changing environment, enables dynamic management of asset classes, securities and risk contributions, and high but not dispersive turnover with zealous attention to costs.

It should not be forgotten that active management is a full-time job, and to be successful one must rely on experienced advisors. In the words of Warren Buffet, "the stock market is a wonderfully efficient mechanism for transferring wealth from the impatient to the patient."