Giving credit to balance — bonds gradually moving from headwind to hedge

Risky assets have consolidated since the summer as rates and energy-price headwinds increasingly offset earnings tailwinds. Global equities have largely moved sideways despite healthy earnings, with the pressure concentrated in rate-sensitive areas such as small caps, real estate and infrastructure. Rising yields have also started to weigh on credit, with widening corporate spreads and a repricing of Euro area sovereign risk. We shift back to an OW equities stance for 3m (in line with 12m). Earnings growth remains supportive for equities and the recent valuation de-rating has improved asymmetry into the Q3 earnings season. We shift OW bonds for 12m, as we increasingly see long duration bonds offering better medium-term value as inflation normalises and central bank pricing becomes less hawkish;