Opportunities on the Horizon
What happened last week?
- The S&P 500 gained 0.39%
- The Dow Jones added 0.34%
- The Nasdaq composite rose by 0.14%
3 Things to Know
Less cash, more duration
This is a time when investors are looking for investment opportunities but are tempted to stay in cash due to high short-term yields. CGWI’s view, reflected in its updated Strategic Return Estimates, is that investors who stay invested and rotate their portfolios to timely opportunities may be well-rewarded over the next decade.
With the positive resolution of the debt ceiling negotiations, we expect to see peak short-term interest rates. We anticipate that the US government will issue an unusually large amount of T-bills and bonds to refill its coffers.
What does this mean for investors?
When that happens, this may crowd out deposits, drive up yields and increase the value of the US dollar. Though investors will be tempted to concentrate assets in T-bills and money market funds, we think this will ultimately hurt their returns.
A different strategy is to extend duration by allocating to intermediate duration corporate bonds, US municipal bonds and preferred equity securities. This way, investors can potentially retain higher yields for longer and may profit if and when interest rates fall, as they likely will when the Federal Reserve reverses course and starts cutting rates.
Seeking value in and out of the US
The peaking US dollar, now near its highest level in 50 years, is likely to begin a gradual, uneven decline.
This trajectory suggests that creditworthy, non-US sovereign debt could be a solid addition to fixed income holdings. Not only may these securities offer higher yields, but the falling dollar may provide a higher total return to maturity.
Non-US equities present good value. Non-US shares are trading at historically wide valuation discounts to US shares. At the same time, the prospects for growth outside the US suggest that non-US earnings may grow substantially.
CGWI has already increased its weighting to Asian, European and Latin American equity markets, while reducing some defensive equity exposures that outperformed in 2022, like large cap pharmaceuticals.
Broadening exposures to tech and growth equity
Early in the pandemic, from 2020–2021, the valuations of large tech stocks surged. Then, in 2022, there was a reversal.
Valuations of growth shares dropped as the Fed increased the Fed Funds rate at an unprecedented pace. But as the yield curve inverted, investors have started to refocus their attention to technology companies with strong balance sheets and growth prospects.
Even though US industries have powerful and promising growth prospects, 2023’s tech gains have been limited to a handful of companies. Large Cap US IT is up 37% year to-date. Firms providing the infrastructure for a new form of artificial intelligence, known as generative AI are responsible for a lot of that gain.
And while we will add further exposure to generative AI, many other future portfolio opportunities may lie in small- and medium-sized tech companies whose valuations do not yet reflect their future growth potential.
See our weekly CIO Strategy Bulletin for more details