Global markets are seeing a steadier tone this year after the turbulence of 2022. The first quarter marked the second quarter of recovery and April saw developed market equities deliver positive returns, although emerging markets and Asia saw moderate declines. Uncertainty around how far central banks will have to hike rates to combat inflation continues to upset bond markets, however. 
This year has seen its drama, most prominently in the banking sector. But this seemed to blow over with swift state support stabilising the situation. Parallels with the global financial crisis were inevitably drawn and Silicon Valley Bank’s demise was the biggest bank failure since then, but the credit issues have remained specific rather than systemic.
Despite the ongoing risks of recession and persistent inflation, the nadir reached last October is looking increasingly like the turning point for markets as they slowly grind higher. Caution is still needed, however, and further volatility can be expected.
Positive on equities
We are more positive on equities overall, and favour the UK, Asia Pacific and emerging market regions.
UK equities remain cheap despite doing well in 2022 because of their exposure to energy and the return to favour of value-style stocks. The UK has a long way to go in its post-Brexit recovery, especially if the rotation to value continues.
In common with emerging markets generally, Asia is benefiting from the reflation trade and loose monetary policies. Asian economies generally fared well during Covid but a lot still rests on China and how it supports its economy in the months ahead. China’s reopening following its draconian pandemic lockdown has arguably underwhelmed but it remains a source of positive momentum for world markets so far this year. Risks remain because of regional political tensions, but Asia has performed well thanks to its commodity links.
Emerging markets continue to prove themselves better at dealing with inflation than their developed counterparts, with central banks arguably closer to the peak of their rate hikes. They continue to enjoy long-term positive fundamentals, such as strong economic growth and demographics, but they can be volatile because they remain geared into sentiment shifts – both positive and negative – and they are sensitive to domestic and international politics.
Towards other equity regions of the world, we are more neutral. US stocks have been expensive for some time, but the corrections seen last year brought them back to more sensible levels. This was partly due to the technology bear market, although large US technology growth stocks have surged this year on expectations that the Federal Reserve’s hiking cycle could end sooner than expected and their costs cut via substantial staffing reductions. The US economy remains in relatively solid shape, potentially benefiting from its isolation in terms of energy policy and agriculture.
European stocks have been unloved since Russia’s invasion of Ukraine, given the region’s proximity to the conflict. Arguably, however, the negative impact is overdone now, and the region could do well from a global economic recovery when it comes because it is home to many multi-national businesses.
While Japanese stocks sold off in line with other regions in 2022, the country is largely unaffected by Asia’s political tensions. However, Japan is reliant on exports, so global economic recovery is crucial for it, although the weak yen could provide some support here. It is also seeing decades-high inflation, partly due to the higher cost of imports on the yen’s weakness, so investors will be keen to see how the new Bank of Japan governor Kazuo Yueda will tackle this.
Bonds offer diversification benefits once again
Although the market volatility throughout most of 2022 reset the prices of many assets, the aggressive interest rate hikes last year caused an historic sell-off in fixed income. After failing to provide defensive ballast against equity sell-offs last year, bonds are providing diversification benefits once again, which could prove helpful in a future crisis. We are becoming more favourable towards the asset class.
Ongoing uncertainty around monetary policies means it is prudent to retain a shorter duration position in fixed income however.
UK gilts were among the hardest-hit government bonds in 2022 and their yields have increased to the point that they could deliver inflation-beating returns over the next five years. However, there are certainly benefits to diversifying to non-UK government bonds, given several other central banks are further ahead in their rate hikes than the Bank of England. Emerging market bonds also offer attractive valuations, with credit ratings generally superior to comparable high yield bonds in developed markets.
Uncertainty creates opportunity
While the economic and geopolitical outlooks remain uncertain, the extreme pessimism seen last year does appear to have passed. Market sell-offs have brought asset prices to more reasonable levels and investors with a long-term view could reasonably believe that the current uncertainty weighing on markets creates a buying opportunity.
John Husselbee is head of the Liontrust multi-asset investment team. The views expressed above should not be taken as investment advice.