Key Findings from the Latest Monthly pack:
Global monetary policy settings are increasingly shifting from headwind to tailwind as inflation falls and economic cycle data remain soft.
The major macro dilemma for investors at this stage is the tails; resurgence risk on the one end (growth reaccelerates, inflation resurges), and recession risk on the other end (recession takes hold, deflation comes into focus).
The second coming of Trump exacerbates this, with a puzzling policy path potentially pushing up inflation, but also raising recession risk (it will all depend on what gets implemented, how quickly, to what degree, and the second order effects e.g. with fiscal consolidation headwinds).
The main upside risks for growth assets would be: a macro middle path (goldilocks, policy perfection), China stimulus, Trump taking a prudent + growth friendly policy path (or short-sharp pain upfront, calm and strength afterwards), and in markets a major upside would be a series of bullish rotation trades…
Among the asset classes most at risk given valuations and the stage of the cycle are US tech stocks $Invesco QQQ(QQQ)$ , US housing, US dollar, and US credit (spreads).
Areas which see superior upside risk/reward meanwhile include government bonds, commodities, emerging markets, and certain sectors on a tactical basis such as defensives, gold(miners) $Gold - main 2504(GCmain)$ , small caps $iShares Russell 2000 ETF(IWM)$ , and frontier markets.
Rotation and Relative value are thus key themes along with smart diversification and risk management (diversify diversifiers, tactically upweight more attractively priced diversifiers + when technicals align).
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