Nowhere to hide, yet no time to sell

There is an old saying in the markets that during periods of heightened volatility, diversification breaks down and asset return correlations converge to one. It is rare but it does happen; and indeed, it happened during the past month globally when the price of bonds, equities, currencies (versus the USD) and even oil all fell simultaneously.

While the reasons for this perfect storm are generally known, evidently they had not been fully priced in. Taken together, the normalising of monetary policy by the US Federal Reserve (Fed), geopolitical uncertainty amid Russia’s invasion of Ukraine, and supply chain disruptions caused by China’s uncompromising zero-COVID strategy – among other things – are stoking recessionary fears – albeit somewhat unfounded, in our view, given that we assign only a 5 per cent chance of recession happening in the next 12 months. We retain our overweight allocation to China equities given the growing evidence we might be rounding the corner on many of the key drags on sentiment.

What to do?