Ken Chambers, Product Strategist: Thinking about the global opportunity set and really outside of the U.S. and maybe the developed markets in the U.K. and Europe, opportunities, vulnerabilities, what are you and the team seeing there?
Tiffany Wilding, Economist: So China has been one of the biggest surprises, I think, since our last cyclical forum in March. Growth has obviously surprised to the downside as a result of their zero-COVID policies, as a result of their kind of stop-start strategy for stimulus, and then obviously their housing market, which has also been somewhat of a policy choice to engineer some deceleration there.
So overall, we think that there could be some more willingness from Chinese policymakers to tolerate some lower growth outcomes, but ultimately we aren’t expecting a recession in China. But nevertheless, we do expect there to be downside risks there. And that, plus higher policy rates in developed markets and commodity markets doing what they’re doing, obviously could be some challenges for broader emerging markets.
Japan has been kind of the one economy for developed markets that hasn’t really seen the type of more sticky inflationary pressures that other developed markets have. And I think that’s raised a lot of questions around Japan in the sense of will they eventually see it, and is just there longer lags to that economy. I think that’s really uncertain.
Nevertheless, I think this environment does raise the risk that they can actually can generate some inflationary pressures like the rest of DM, in which case you would have to see that policy adjustment coming out of the Bank of Japan. So I think still a lot of uncertainty around that economy as well.
Chambers: Tiffany, thank you, Dan, turning to you to walk through some of the investment implications.
Daniel J. Ivascyn, Group Chief Investment Officer: Sure. So to start, given significant global economic uncertainty, geopolitical risks, we think it makes sense to be more liquid and more defensive. With that said, we are seeing some interesting opportunities.
Within the emerging market area of the opportunity set, more cautious on China, more cautious about Chinese credit. China doesn’t have the same type of inflationary pressures. So yields in their bond markets look less interesting to us.
But other areas of the emerging market opportunity set for some of the higher-risk strategies do look interesting. Central banks across the emerging market world have been more aggressive than developed market central banks.
You’re seeing some turning of inflation at a more aggressive pace, Brazil as an example, where central banks have been very, very active early on.
Then, when it comes to the U.S. dollar, almost universal acknowledgement within the firm that the dollar looks quite expensive from a longer-term valuation perspective, but also a hesitancy to be too aggressive in reflecting a negative dollar view at this point in time.
There’s tremendous absolute relative momentum to the U.S. economy.
You have a central bank now that is tightening very, very aggressively and lot of other uncertainty that could lead to a flight-to-quality dynamic that supports the U.S. dollar.
So existing firm-wide positioning is a slight tilt to non-dollar currencies but sized at a very, very small level relative to the amount of risk we could take in theory, given that we expect there to be better overall entry points.
So there are going to be some targeted opportunities in terms of some of the higher-quality, local interest rate markets. There’ll likely be some opportunities in some of the higher-quality credits as well, as a source of diversification versus more traditional credit in the U.S. and in Europe.
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