Investment giant Janus Henderson Investors is entering the second half of 2022 still underweight in equities within its multi-asset portfolios, although in the second quarter it raised its exposure to China.
While risk assets are cheaper than they were at the start of the year, Paul O’Connor, head of multi-asset at Janus Henderson, said this should be expected given the geopolitical, policy and growth risks overshadowing the months ahead.
“While tactical indicators offer hope for a short-term bounce in stocks, longer-term measures of investor positioning indicate limits to the upside,” said O’Connor. “Investors came into the year [with] high exposures to stocks and they have kept buying.”
Looking forward, O’Connor said Janus Henderson see two paths that could lead to the bear market bottoming out in the second half of the year.
“The bumpy one would involve equities and credit selling-off to the extent that they priced in the worst plausible economic scenarios and allowed central banks to back off,” he said.
“The more benign route would involve a surprising easing of underlying inflationary pressures and a constructive rethink on the interest rate cycle. Both still seem some way off.”
Equities
In terms of the portfolios, with the FTSE 100 still “attractively valued” and having a sectoral composition that is well suited to the prevailing late-cycle macro environment, O’Connor said he remains overweight in UK large caps.
“Our other favoured equity market is China,” he said. “We moved overweight Chinese stocks in Q2. Chinese equities have already experienced a major bear market, a significant valuation derating and wholesale investor capitulation.”
For O’Connor, China is one of the few major stock markets in which monetary, fiscal, and regulatory policies are all tailwinds for risk assets.
Fixed income
Away from equities, in fixed income, O’Connor said he has moved back to a neutral stance on duration in recent months, taking the view that government bonds can regain some of their risk-hedging characteristics as growth begins to slow.
“Yield curves have flattened, commodity prices and inflation expectations have fallen, credit spreads have widened, and defensive stocks have outperformed cyclicals,” he said.
“Markets are now pricing in a slowdown but are still a long way from pricing in recession,” he added.
“Growth concerns look set to intensify in the months ahead, as policy tightening takes its toll on growth, with the usual lags.”
