The global growth outlook has materially lowered for 2023, with a clear loss of growth momentum worldwide and stagflation risk rising. The current juncture of weak global growth and tighter financial conditions could lead to recession, especially in the Eurozone. Market attention is turning to growth, considering the possibility of recession. Bonds could serve as a diversifier in an economic downturn.
Lower growth ahead
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Committed Central Banks to fight inflation
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Attractive absolute and relative valuations
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Higher yields
Investors have a good reason to buy bonds again: yield. The repricing in bonds is advanced and yields have surged back toward more ‘normal’ levels from a historical standpoint. Higher yields give investors the opportunity to re-engage in both the government and high quality credit markets, but selection remains important for the latter.
Although CBs have started their rate hiking cycles to curb inflation (nearing its highest level in four decades) which may be close to a peak, inflation would still be above CB targets. Some CBs will need to move further towards the normalisation of monetary policy (with higher interest rates and reduced balance sheets), which could also hamper growth moving forward. This calls for an agile approach to bonds.
After yield reprincing, Bonds offer more attractive valuations in absolute and relative terms. Valuations have dropped due to the recent fast rise in global rates coupled with wider credit spreads, opening up fresh opportunities for investors.
Source: Amundi Institute as of 22 September 2022 CB: central banks
Source: Amundi Institute as of 22 September 2022 CB: central banks