In fixed income, government bond yields were highly volatile due to resilient US macro data and broadly hawkish developed market central banks, Villamin continued. US, European and UK 10-year yields have rebounded over the month and potential upside risks remain due to further adjustments in key rates and large issuances from the US Treasury after agreement reached on a debt ceiling, he said. Credit remains his preferred asset class within fixed income, and his preference is for investment grade corporate bonds, with a focus on credit quality.

In equities, he believes that opportunities to add risk in portfolios are likely to arise in the second half of 2023, notably among US mid-cap companies and the commodity sectors amid a rotation out of US mega caps. Villamin is currently neutral on equities.

After a strong performance in 2022, hedge funds have underperformed since the start of the year due to the lack of volatility. However, the asset class is valuable in providing diversification benefits, he said.

Outlook
Villamin expects a moderate level of global growth in 2023 and 2024. The Asian recovery is expected to cool a little over the next quarters, but it will remain a large contributor to global growth, he continued. Developed countries face growth below 1 per cent in both 2023 and 2024. Visibility remains low and uncertainties are in place as growth engines need to be rebalanced from present buoyant sectors (labour, services) to weak sectors (manufacturing, capex), he said.

Europe should have the potential to stay on a flat sequential growth path over the next quarters, and performances will diverge across countries, he said. The US economy is likely to see slower activity as the manufacturing sector has contracted; services should moderate after strong activity on restrictive monetary policy and tighter credit, he added. Headline inflation has peaked and begun to decline in several countries, but core inflation is still moving only slowly as labour and services are resilient. Monetary policy will remain restrictive as inflation is still above targets despite weakening activity, he said.

Villamin believes that global growth should avoid a deep recession, but it will remain moderate in the second half of 2023 and in 2024. The gap between growth in emerging countries and developed countries is likely to remain large, he added. Asian growth looks set to remain sustained in 2024 after a rebound in 2023. In China, growth should moderate to 4.5 per cent in 2024 after 5 per cent in 2023, he said. After the boost due to the reopening, activity weakened with the drag from housing, exports and a moderate level of consumption.

The outlook for developed countries is mixed as growth seems stuck below 1.5 per cent in 2024 after a 0.5 to 0.8 per cent range in 2023, he continued. Sequential quarterly growth may well be more constructive in 2024. Strong labour, services and healthy household balance sheets are buffers but sluggish growth or a technical contraction are possible in the short term, Villamin concluded.