The US has experienced a more resilient job market and stickier inflation than Europe, due to unique factors such as a surge of immigrants. As opposed to the prior belief of a concurrent rate pivot mid-year, the ECB looks increasingly likely to kick off the next rate cutting cycle sooner than the Fed. Therefore, we recommend using the recent spike in bond yields to buy EUR-denominated investment grade bonds, from which we expect greater price gain potential than the USD-denominated bonds.
The world is never short of surprises. Not too long ago, money markets were more aggressive than the Fed‘s projections for rate cuts, the so-called ‘Dot Plot’, having priced 150 basis points of cuts this year. The strong March US payroll employment report and inflation prints have upended such optimism and thrown the much-anticipated Fed pivot on rates into a tailspin. If you don‘t find it challenging enough, Iran-Israel tensions are adding fuel to the fire. To navigate this environment, as investors, we should play both defence and offence. We play defence by maintaining an all-weather foundation portfolio, diversified across asset classes and geographies, as an anchor. Meanwhile, we can take an offensive approach by adding targeted, opportunistic ideas around the core portfolio to exploit market dislocations.
Opportunity 1: Divergence in the timing of rate cuts
