Inflation, a global economic slowdown, and high-interest rates have brought uncertainty to equity markets. Wellington Management says that while growth will weaken going forward, equity fundamentals in US and Japan are better off than in Europe and emerging markets.

In a multi-asset outlook published by the investment management firm, Nanette Abuhoff Jacobson, Global Investment and Multi-Asset Strategist, at Wellington, says, “Within our moderately underweight view on global equities, we continue to prefer the US and Japan but are more negative on European equities. The US is supported by consumer spending and balance-sheet health, while a European recession due to the energy supply shock seems inevitable.”

Wellington Management believes that an energy supply crunch in Europe will last at least until 2025-26. In emerging markets, there is regulatory uncertainty in China and a real estate crisis, while EMs are also dealing with high prices of food and energy. “The hawkish Fed and strong US dollar are weighing on risk appetites broadly, and especially for emerging markets,” says Abuhoff Jacobson.

However, the investment management firm says that Japanese equities could benefit from ideal valuations and a weak currency.

On the fixed income side, Wellington says that it is now moderately underweight on investment-grade corporate bonds from its previous stance of moderately overweight. However, it sees select opportunities in short-end credit, given low dollar prices and attractive carry. High-interest rates have increased the yields, but spreads are not wide enough in growth fixed income to compensate for higher defaults in case of a recession.

While there are pockets of opportunity, Wellington says a severe recession in the US and Europe could pose a problem, along with the ongoing war in Ukraine.

View the complete insight here.