Opportunities on the Horizon: Investing Through a Slowing Economy

Overview | WEALTH OUTLOOK 2023 | MID-YEAR EDITION | 25 Fixed income allocations In the short-term, staying invested in cash or ultra short-term fixed income securities represents a risk to medium-term returns as reinvestment may occur at lower future yields. The US yield curve is inverted, with the shortest- term bonds yielding the most. Investors should consider transitioning away from non-core cash and short duration fixed income investments. Higher yields may be achieved by prioritizing the selection of quality investment grade corporate credits. After a substantial yield rise a compelling case for adding to emerging market debt (US dollar- denominated) is building. We also see potential opportunities in private credit and other areas of illiquidity and dislocation in the fixed income markets. For qualified investors, private credit and other alternative funds may bolster medium-term fixed income returns. A coming reallocation within equities Defensive positioning in equities should not mean staying out of the market. For now, dividend growing companies may help reduce portfolio volatility while also offering some growth and income. We believe that small and mid-sized firms in the US, and select emerging markets, are becoming undervalued. Our opportunistic overweights by industry include cybersecurity and semiconductor equipment, defense shares among others (See Putting national security interests ahead of economic cooperation: The evolution of G2 deglobalization and its implications ) . Diversification of currency exposure After a decade of US dollar dominance, currency exposure diversification may be important for the potential to strengthen investment returns and long-term preservation of investors’ wealth. In addition, qualified investors may consider diversifying portfolio exposures into non-US dollar investments in applicable asset classes. In cases where investors have large holdings in less liquid US dollar assets, it is important to consider the use of these risk management strategies to possibly mitigate the impact of the bearish US dollar trend. Unstoppables remain Unstoppable trends continue as long-term multi-year trends that are likely to transform the world around us, including technological advances, demographic developments and new behaviours. Broad thematic funds seek to capture these potential opportunities. Based on each investor’s objectives they may use strategies to build the exposure gradually with a long-term view. Currently, some of the sub- trends such as cybersecurity and life sciences offer good entry points. Signals to follow We believe decision-making should be guided by holding asset allocation within diversified portfolios. In our multi-asset class strategies we seek to rotate to different types of equities and, ultimately, tilt portfolios toward a greater exposure to equities. We do not believe that cash yields will be as strong a year or more from now. How can suitable investors raise equity allocations? • Selection of equity markets and sectors that have lower than typical valuations • Investments that may provide suitable investors with an entry point at the minimum price of a market over a pre-set period • Strategies that seek downside risk mitigation at the price of giving up potential returns • Markets that may benefit from foreign exchange movements into returns