Asset Allocation
There is a path to a soft landing, but it is a narrow one. We estimate that there is only a 20% chance that the US will avoid a recession before the end of 2025. We are currently neutral on global equities, but expect to downgrade stocks to underweight during the summer.
We are positive Private Credit but currently underweight Public BDCs. Today’s market pricing and sentiment in BDCs are excessively optimistic. Long-term investors should await a better entry point. Traders may find an attractive short. This report also peels back the Public BDC onion and presents over/underweights across individual BDCs via our filtering methodology.
Also included at the end of this report is an updated presentation titled 'Private Credit: Drivers Of The Boom And Understanding Risks On The Horizon,' recently presented at GII’s Private Credit Roundtable in Australia. It features updated charts and additional analysis.
Q1 Earnings and sales growth were strong, but the devil is in the details: Without the Magnificent Five, earnings growth for the index would have been negative. On a positive note, margins have stabilized, and earnings growth is expected to broaden into yearend. Companies are optimistic about the economy. Development of AI applications is in full swing, but few companies are monetizing them yet. Consumer spending is strong but is slowing. We reiterate our underweight of consumer sectors, and overweight of Software and Services as the “don’t fight AI” adage holds.
In this week’s report, we defend four out-of-consensus claims. Claim #1: Underlying inflation in the US is not reaccelerating. Claim #2: The US labor market is set to weaken abruptly. Claim #3: The S&P 500 will drop to 3700 in 2025. Claim #4: Japan is not in danger of a currency crisis.
MacroQuant downgraded equities from neutral to underweight on a 1-to-3 month horizon. The model suggests increasing exposure to cash.
We go overweight Late-Stage Venture Capital and APAC Private Equity but remain underweight North America Buyouts. We maintain our neutral outlook towards Hedge Funds and are positive on Long-Short Equity, Event Driven, and CRO strategies. We are cooling towards Direct Lending strategies as competition and relative opportunities increase. CRE’s downturn continues to unfold; we are starting to be buyers.
Q1 earnings results of the largest US banks have demonstrated that the engine of recent growth in profitability, NII, has faltered as funding costs are rising fast. However, the resurgence in non-NII thanks to a revival in corporate activity has been a saving grace. Earnings growth appears to have bottomed, while valuations are attractive. To play up portfolio exposure to an upcoming surge in capital markets activity, and minimize exposure to declining profitability in traditional banking services, overweight Diversified Banks and Capital Markets, and underweight Regional Banks.
This year’s rise in commodity prices represents a blow-off rally rather than the start of a durable bull market. The global economy is heading for a recession. Stocks, commodities, and other risk assets are vulnerable.
In this note, we preview the Q1-2024 earnings season, give our take on expectations and share what we will be watching.