Our Chief Cross-Asset Strategist explains why the high
correlation between stocks and bonds could work in investors’
favor throughout the second half of this year.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Serena Tang, Morgan
Stanley’s Chief Cross-Asset Strategist. Along with my colleagues
bringing you a variety of perspectives, today I’ll discuss why we
believe bonds and equities can both rally this year, with the
still-elevated correlations between the two assets a boon rather
than a bane to investors.
It’s Monday, June 3rd at 10am in New York.
In our mid-year outlook two weeks ago, we expressed our bullish
view on both global equities and parts of fixed income space like
agency mortgage-backed securities and leveraged loans, on the
back of the benign economic backdrop our economists are
forecasting for in the second half of 2024.
Now, this may be surprising to some. Received wisdom is that in
an environment of rate cuts and falling yields, equities can't
perform well because the former usually maps to growth slowdowns.
When equities see double-digit upside – which is what we’re
projecting for European equities – it’s unusual for bonds to also
see strong and positive returns, which is what we’re projecting
for German government bonds.
And I want to push back on this received wisdom that we can’t
have an ‘everything rally’. When we look at the annual
performance of global stocks and 10-year US Treasuries every year
going back to 1988, in the 13 times when the Fed cut rates over
the course of the year, bond yields were lower and equities were
up 43 per cent of the time. And in those periods, stock returns
averaged 18 per cent while yields fell over 1 percentage points.
‘Everything rallies’ happen often in this very macro backdrop of
benign growth and Fed cuts we’re expecting, And when they do
happen, everything indeed rallies – strongly.
Or to frame it another way – our expectations for both global
equities and fixed income to see strong total returns this year
is the flipside of what markets had experienced in 2022. Now back
then, unlike in most other prior cycles, stock-bond return
correlations were high because inflation was elevated even as
growth was sluggish, meaning that bonds sold off on higher rates
expectations, and equities on bad earnings. Today, with our view
that global growth can be robust while disinflation continues,
the opposite will likely be true; bonds should rally on lower
rates expectations, and equities on strong earnings revisions.
Stock-bond return correlations are still elevated, but
it should work in an investor’s favor this year.
Lean into it. Good macro, fair fundamentals, pockets of
attractive valuations all make for a strong environment
for risk assets, a reason for us to get more bullish on European
and Japanese equities, but also in fixed income products like
leveraged loans and Collateralized Loan Obligations.
Thanks for listening. If you enjoy the show, please leave us a
review wherever you listen and share Thoughts on the Market with
a friend or colleague today.
Kommentare (0)
Melde dich an, um einen Kommentar zu schreiben.