For the first time in years, investors are wondering about the interesting asset classes to invest. TAPAS, or “There Are Plenty of Alternatives” are making a comeback.
After more than a decade of TINA, here we are in the era of TAPAS. TINA, or “There Is No Alternative” defines a macro-financial environment of low rates which constrains investors to obtain a significant return only by the most risky assets such as equities. However, this decade seems behind us. Interest rates are high to contain inflation that is still high, and these financial conditions could persist for a long time.
For the first time in years, investors are wondering about the interesting asset classes to invest. TAPAS, or “There Are Plenty of Alternatives” are making a comeback. US, European and Swiss 10-year yields rose sharply to 3.5%, 2.3% and 1.2% respectively. Above all, risk premiums on corporate credit have never been so attractive for a decade. This results in attractive investment solutions to diversify the portfolio while waiting for better financial prospects on the equity markets.
Global growth is likely to slow this year. The impact of the tightening of financial conditions in the United States on economic activity will be observable in the second half.
The macro-financial environment will probably remain difficult in 2023. Inflation has certainly fallen to 6% in the United States and 6.9% over one year in Europe. Nevertheless, the decline is mainly explained by energy, while inflationary pressures on rents in the United States are increasingly significant. In many economies, core inflation could rise above headline inflation during the year. The FED, the ECB and the SNB will thus be forced to maintain their rates or to tighten them further, which is not anticipated by investors who are seeing Fed rates drop 100 basis points in the 2nd half. If the dilemma between price stability and financial stability emerged in March, the fact remains that the alchemists within the central banks will have finally found the solution: tightening interest rates while providing new liquidity at discretion. The technology sector benefited from these new announcements and from investors’ optimistic expectations of rate cuts.
However, global growth is likely to slow this year. The impact of the tightening of financial conditions in the United States on economic activity will be observable in the second half. Analysts are taking into account a 60% probability of recession by the end of the year. This outlook has not changed to the downside. Above all, recent events confirm our positive views on companies with a solid balance sheet, a business that is by nature more defensive and a competitive positioning that preserves margin rates. In fact, quality values remain our priority within the equity pocket. More generally, we are maintaining our caution on equities and very gradually increasing the duration within the bond pockets.