September has always been a seasonally weak month for equities, and the market’s performance over the past month has certainly reinforced that reputation. Belligerent comments from top Federal Reserve officials have further heightened market jitters at a time when investors are anxiously weighing their next move. Cleveland Federal Reserve Chair Loretta Mester said last week that she saw more room for further rate hikes and that a recession would not prevent the central bank from acting. With monetary policy expected to tighten further in the coming months and Wall Street mired in the depths of a bear market, many investors are beginning to wonder if now is the right time to exit the stock market and place their money in other asset classes. CNBC Pro spoke to market watchers and scoured investment bank research to find out what the pros think. State Street Ben Luk, senior multi-asset strategist at State Street Global Markets, believes there’s “no point” for investors to flee stocks, simply because “there really isn’t too much bond markets to go to anyway”. Instead, it’s about where investors allocate their money in space. “We like quality defensive companies that pay good dividends. We like energy stocks, we like material stocks, we like healthcare stocks, that will be an area we will always stick to in terms of preference for stocks,” Luk told CNBC Pro. But it takes a “market-neutral” approach, where it funds its “overweights” with “underweights” in financials, utilities and retail, thereby maintaining its overall equity allocation within of the portfolio. He believes that a portfolio comprising 50% stocks, 30% bonds and 20% cash “still works well” and does not require “major change” at this time. But he warned that the cash allocation could increase as uncertainty mounts. Cash levels in previous “crisis scenarios” such as the dotcom bubble and crash of 2008 were around 25% to 30%, compared to the current level of around 19%, Luk noted. In the bond space, he thinks US Treasuries will benefit the most from capital inflows into America as recession risks increase. They are the most defensive when it comes to hedging against equity risk, Luk said. UBS The 60-40 balanced portfolio, where 60% is invested in equities and 40% in bonds, has traditionally been the mainstay of a diversified investment strategy. But Kelvin Tay, regional investment director at UBS Global Wealth Management, believes the strategy could “suffer” as the market environment changes. “We advocated for investors to have alternatives in their portfolios because over the next five years, as we move from a very low interest rate environment to a structurally higher interest rate environment, traditional balanced portfolios of bonds and equities will suffer. This year has been really telling,” he said. Investors should be exposed to private equity, private debt and hedge funds to “anchor the portfolio, he added. Tay noted that macro-hedge funds are doing “very well” due to the flexibility to adjust their holdings, while the longer investment horizons of private equity mean that “returns are generally much better” if investors hold them longer.BlackRockMeanwhile, BlackRock – the world’s largest asset manager – said in a Sept. ber that he had a bearish view of equities. “Many central banks fail to recognize the depth of the recession needed to bring inflation down quickly,” Jean Boivin and his team of strategists at the BlackRock Investment Institute wrote in the note. “The markets haven’t priced that in, so we’re avoiding most stocks.” He said he didn’t see the Fed making a soft landing, which would in turn create more volatility and pressure on risky assets. “We are tactically underweight developed market equities because equities do not fully price recession risks… We prefer investment-grade credit because yields better offset default risk. Additionally, high-quality credit can better withstand a recession than equities. We find inflation-linked bonds more attractive and remain cautious on long-term nominal government bonds in an environment of persistent inflation,” Boivin said. Goldman Sachs Goldman recommends investors to favor short-duration stocks over long-duration ones: “Stocks whose cash flows are strongly oriented towards the distant future are more sensitive to variations in the discount rate via higher interest rates”, Goldman strategists, led by David Kostin, said in a Sept. 23 note. “Elevated uncertainty argues in favor eur of a defensive positioning. Soaring rates mean that the short term will outperform the long term. Own stocks with “quality” attributes such as strong balance sheets, high returns on capital and stable sales growth,” he added. The bank’s “short-term basket” of stocks includes Macy’s, Warren Buffett’s favorite General Motors, Occidental Petroleum, Regeneron Pharmaceuticals, Micron, Advanced Micro Devices and Valvoline Stocks that made up Goldman’s “high-quality basket” include Alphabet, O’Reilly Automotive, Home Depot, Thermo Fisher Scientific and Accenture.
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