Foresight Cyclical Asset Allocation View


Key Points


➢ A global recession remains our base case. Gradually tightening financial conditions
are grinding the global economy into a recession. The speed of the slowdown could well
be frustrating for those expecting a recession. However, this is not the time to abandon
recession positioning. All our key recession indicators still suggest one is imminent. It’s
possible central banks will continue to raise interest rates, but the tightening cycle is well
advanced, and the full effects are yet to be felt.

➢ The good news for central banks is that in the US labour demand is softening
and inflation expectations remain contained. The problem is that inflation remains
well above target and will only become contained once unemployment rates rise. History
shows that a significant rise in the unemployment rate is nearly always associated with a
recession and this implies a large equity market drawdown. We still think we are partway
through the adjustment in equities. Government bonds always rally and credit spreads
always widen during a recession.

➢ We retain our large underweight to Growth assets and large overweight to
Cash. We increase by 1pt our overweight to Australian fixed income and global
infrastructure. We cut our neutral position in US High-yield credit to underweight. We
continue to have a large underweight in global property and infrastructure, given the full
effect of last year’s interest rate rises is yet to be reflected in valuations.

➢ Japan and Australia remain our preferred equity markets followed by Europe
and EM. The rally in the US market is very narrowly based and forward earnings
expectations are well above those expected in a recession. Margins are contracting
meaningfully and have further to go as demand continues to soften. The rally in Japan is
based on supportive fundamentals such as valuations and rising earnings expectations –
the market’s outperformance should continue.

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