While 2023 has started out positively for markets, is it now time to start thinking about increasing exposure to risk assets?
After all, a more benign outlook for rate rises in 2023 has proved beneficial for bonds and shares; as a recent investment note from Axa Investment Managers states: "Markets are rallying because this period of monetary tightening is almost over.
"Not raising rates anymore is, by itself, bullish for stocks", says Chris Iggo, chairperson of the Axa IM Investment Institute.
But not everyone is keen to rush into risk assets.
Some managers advocate caution, while others suggest raising risk right now is itself too risky.
One cautious commentator is Mike Coop, chief investment officer for EMEA at Morningstar.
He says the set of possible economic and market scenarios is “unusually wide” from here, and so increasing exposure to risk assets is unwise.
Coop believes that portfolios should always have investments which do well in a wide range of scenarios, “rather than trying to predict when a recession will happen, which is impossible, and then position for that recession, one should always be thinking about recession protection.
"One should always be thinking about inflation protection, and having assets that perform well in both of those scenarios in portfolios.”
He says returns were stronger than the market average for his portfolios in 2022 as a consequence of being very underweight US equities and bonds, and owning more in the UK.
Of the rationale for those decisions, he says: “We worked with our equity research team on the prospects for the tech companies in particular in the US, and felt that even on an optimistic view, they were overpriced.
"And as far back as 2020, when the marketing was sharply pricing in a recession and no one was worried about inflation, we were able to buy energy stocks very cheaply, and those offered inflation protection last year."
Valuation is key
He adds investors tend to forget about inflation protection when recession font and centre, and forget about recession protection when inflation is front and centre. But the key is always to think about valuation.
"An asset could do well if there is a recession, for example, but still be a poor investment if priced wrongly", Coop says, adding: "US equities continue to be overpriced, and equities generally are not cheap".
As for bonds, he feels bonds are more attractive right now, despite being a slightly "less intuitive" investment in a world of higher inflation.
He says: “If you want to own a bond for the medium to long-term, say 5-15 years, then really the rate of inflation today is less important than what the rate could be over the average lifetime of the bond.
