Welcome to Soundbites, weekly insights on market trends and investment strategies, brought to you by Investment Executive and powered by Canada Life.

For today’s Soundbites, we’re talking about global markets and asset allocation with David Brown, managing director and investment specialist with J.P. Morgan Asset Management. We talk about growth risks, currencies and duration. And we started by asking about his current portfolio positioning.

David Brown (DB): Across our book of business, we’ve become, I would say, relatively more cautiously positioned, given where we were at the start of the year. At this point, we see recession versus no recession probability as basically a 50:50. If you look at corporate earnings, they are seeming to decline. In terms of portfolios, we are closer to neutral overall in equities. We like the U.S. large-cap space for its more defensive characteristics. And then on the fixed-income side, our preference for duration has been shorter maturity investment grade, relative to more risky credit, such as high yield, just given the higher carry there, and being more insulated from that weakness that I just spoke about.

Regions he likes.

DB: The fundamental backdrop in Europe has had economic surprises to the upside. You’ve seen Europe outperform the U.S. quite handily year to date from an equity market perspective. So, we really like Europe and continue to hold that as one of our higher-conviction views. China, it’s more of a mixed bag, especially with what has happened with the dollar. The pent-up demand there, the fact that people are coming off of, essentially, two-plus years of being locked down, and now are much more mobile, we do think that China, and more broadly EM, is probably poised for some better performances. So, we like those two regions fundamentally as well as, on a relative basis, from a valuation perspective.

On government bonds.

DB: With higher yields, it really gives us an opportunity to rethink the way we’re using government-bond duration in our portfolio. We’re using a blend of U.S. treasuries and non-U.S. government debt. Namely, we like JGBs [Japan Government Bonds] and German bunds, as examples of non-U.S. government debt that we are leaning into. And then, in terms of where we’re positioning on the curve, we’re kind of barbelling it, taking advantage of the long end, as well as the short end. And, as we expect the yield curve to steepen over time, we hope we will benefit from that with our longer treasury positions as well.

The state of equities.

DB: We’re coming through the earning season now. And while there’s been a decline in corporate earnings overall, it has not been a disappointing earnings season. Low growth doesn’t mean no growth. Our equity outlook is that the markets outside the U.S. that are cheaper in terms of valuation and have the benefit of a higher level of growth compared to the U.S. is where we want to take advantage — the Eurozone being the most direct example of that. In equity, we continue to be neutral overall, with a preference for non-U.S. developed markets, but still holding some U.S. large cap, given its defensive characteristics.

Currency concerns.

DB: Overall, currency is a pretty mixed picture. We think that the U.S. dollar peaked towards the end of last year. So, the direction of travel for the dollar, in our view, is likely downward from here. And currencies that have benefited, or have been on the rise, have been some of the larger developed market currencies. So, the Euro, sterling and the yen have all appreciated relative to the dollar. A lot of that can be explained by what those central banks are doing, being more hawkish, now having higher inflation relative to the U.S. And so, it makes sense that those currencies would have strengthened in the near term.

And finally, what’s the key take away on global asset allocation?

DB: My key take away would be, ‘Proceed with caution and pay attention to the data in looking for opportunities.’ Our economy in the U.S. — and in developed markets more broadly — are heavily driven by consumption. And what we’ve seen, looking at some of the higher-frequency data, is that consumers, they have been incredibly resilient. So, we believe that there will be opportunities to invest and to take advantage of dislocations.

Well, those are today’s Soundbites, brought you by Investment Executive and powered by Canada Life. Our thanks again to David Brown of J.P. Morgan Asset Management.

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