Market Perspectives by PineBridge Investments

One of the key reasons we have been cautious about risk and reducing our equity exposure is the inconsistency between a deteriorating macroeconomic outlook and companies' strong forward earnings estimates. Our base case is that the Fed's push to tighten financial conditions will translate into materially lower earnings growth and a potential rise in unemployment, which we want to see reflected in prices before becoming more constructive. Additionally, we are looking for more clarity on companies' ability to manage margins and their future hiring intentions to understand better the degree to which earnings need to be revised lower.

With inflation rising and real rates turning positive to negative, we focus on idiosyncratic opportunities. We continue to find attractive idiosyncratic/uncorrelated opportunities across both growth and safety assets, namely, Commodity Carry, EU Carbon Credits, Aluminum and Equity Market Neutral strategies.

While no factor adequately explains Gold's performance, the best explanator is the real interest rate. Gold can find temporary support when recession risk becomes elevated. Yet, this phase is erratic and difficult to anticipate/monetise. While Gold performed well at the beginning of the Fed's rate hike cycle, where investors were pricing in recession risks more, the recent performance can be explained by the real yield/USD strengthening dynamics - the opportunity cost for holding gold rises as real yields on alternative choices rises. We expect real yields to rise as central banks withdraw liquidity from the system, which will be a sustained headwind for Gold. Again we focus on the idiosyncratic opportunities above. We believe it is essential to be dynamic and remain diversified in this environment.

Relative to other markets, India has been very strong. This is primarily because it is a defensive market driven by domestic demand. From a valuation perspective, it looks expensive. However, over the next 9-18 months, we think the broad acceleration in private CAPEX coupled with solid credit growth should support Indian equities. However, it is important to keep in mind that the main risk is the widening current account deficit and the weakening INR.