"There are pockets of future positive performance in equities", but Fabiana Fedeli, chief investment officer - equities, multi asset and sustainability at M&G Investments said he had "turned more cautious on the overall equity market in the near term".
In M&G’s latest quarterly equities and multi-asset outlook – Q4 2023 paper, Fedeli said: “With real rates now in positive territory even in the US, equity risk premia have risen, putting pressure on equity markets. This could continue for a while.
“Our Tactical Allocation Multi Asset strategies have reduced wider equity market exposure and added to fixed income."
Fedeli added that she found the long end of the developed sovereign bond markets - including US, UK, and German 10- and 30-year government debt - more attractive following the recent price sell-off.
“It is always difficult to find the perfect entry point in the midst of market volatility. That said, with the Fed closer to the end of its hiking cycle, historically this has been a precursor of peak rates at the long end of the curve.
“The long end of the curve also serves as an ‘insurance’ should a macroeconomic slowdown ahead be more significant than the market expects.”
However, Fedeli stressed she was “not running for the exit” in equity markets.
She added: “We still find attractive pockets - a gift that we often get from fearful markets - but selection remains key. Given the uncertain macroeconomic backdrop, in equities, we prefer investments where structural drivers are stronger than cyclical exposure.
“We remain selective and high on the quality spectrum. We invest in companies with strong moats, pricing power, balance sheets, and cashflow generation. We continue to favour structural long-term themes that should prevail, independent of near-term volatility; infrastructure, the low-carbon ecosystem, and innovation, including AI.”
“Importantly, we still don’t believe this is the time to buy broad markets. As companies deal with a high-interest rate and a positive real rate environment, weak demand, and relentless innovation, there will continue to be winners and losers.”
