In our multi-asset portfolios, we are using current market opportunities to make tactical adjustments. These changes reflect valuations as well as our view that European bond yields do not reflect the potential for moves higher – and likely ECB action – in the face of sticky eurozone inflation.
First, credit is upgraded to ‘favour’, in particular European investment-grade credit, where we are seeing pronounced distress and an increasingly attractive valuation opportunity.
Second, after the sharp rally in European duration, we are tactically deepening our short position. In our view, inflation is not going away in Europe anytime soon, so the ECB looks unlikely to be cutting interest rates by early 2023 as markets have it priced now. Bond yields should be higher, not least to reflect the shift in the fiscal paradigm thanks to the Next Generation EU programme.
Third, our equity positioning is back at ‘neutral’ by selling our modest emerging market equity exposure, while we keep our long Chinese and Japanese equity exposures against a short in European equity. We see this as a ‘cleaning-up’ trade rather than a shift in our underlying views.
Asset allocation views as of 13 July
 European investment-grade credit takes 10% in multi-asset terms, European sovereign exposure is -5%. Our fixed income colleagues are neutral, but also with a short tactical bias at current pricing.