Despite the recent surge in US growth stocks, Paul O’Connor, head of multi asset at Janus Henderson Investors, believes now is not the time to be rotating into risk assets.
Having started July some 30% below where it began the year, the Nasdaq 100 jumped some 13% last month despite the US economy slipping into a technical recession.
However, while O’Connor sees pockets of value in global markets after the wipe-out in the first half of the year, he said that he is wary of extrapolating recent markets gains too far.
O’Connor noted that as interest rate expectations moved higher, July saw a sizeable relief rally for both defensive and risk assets.
“With investor positioning generally still fairly cautious, the recent rebounds in both equities and government bonds could have further to run, if economic data and central bank messaging remain supportive,” he said.
“However, the path to a sustained rally in risk assets from here seems a particularly narrow one, with sizeable risks on both sides.”
‘Choppy’ markets
From a growth perspective, O’Connor noted that global risks continue to accumulate, with macro momentum slipping in all the major economies as the reopening booms fade and monetary tightening begins to bite.
“Consensus forecasts for real US GDP growth for 2022 have fallen from around 4% at the start of the year to 2% today,” he said. “Predictions for next year’s growth are just: 1.3% in the US, 1.1% in eurozone and 0.6% in the UK.”
As a result, O’Connor said, within its multi-asset portfolios, Janus is leaning more towards “fading the rally in risk assets than chasing it”.
“We can envisage a fundamental path higher for risk assets from here, but it is a narrow one, requiring enough of a slowdown to validate recently lowered rate expectations but not so much as to accentuate growth concerns,” he said.
“For now, this is not our base case. We expect markets to remain choppy and regard the unfolding rally as a good opportunity to add resilience to portfolios, by rotating exposures towards the quality end of each asset class.”
