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Manulife InvestChoice – 2023 Q2 Asset Class Outlook

April 2023

Quarterly Asset Allocation Views1


 We remain neutral Equities on a tactical basis and remain cautious as the market outlook looks concerning, given rising volatility across assets and tightening liquidity. Persistent labour market strength is constructive for growth, but credit standards may tighten, given pressure among certain banks. Elevated inflation requires central banks to keep tightening monetary policy via rates and shrinking balance sheets to restore credibility and re-anchor inflation expectations. However, financial stability concerns are on the rise. We generally prefer a selective geographical location and sector approach to broader market replication. Also, we continue to use risk-management tools and equity futures to manage market volatility on the back of rising inflation, central-bank rate hikes and geopolitical uncertainty. We are slightly more positive on broad Emerging Market (EM) Equities – while the China reopening narrative has become somewhat consensus, we still see opportunities. Trade and tourism should further rebound going into Q2 2023, and Asian currencies (FX) are set to further rebound from historical lows. Looking ahead into 2023, we expect a pause in the US Federal Reserve’s (Fed) aggressive rate-hike cycle and a pivot to eventually occur (as the narrative shifts to growth concerns). However, until this pivot materialises, we will remain cautious given US labour market resilience and the potential for ongoing Fed tightening beyond what the market has already priced, which would result in further volatility. 

  • Tighter financial conditions, heightened geopolitical risks, and recessionary fears have taken a heavy toll on the economic outlook and valuations. The recent shutdown of multiple regional banks and the merger of two Swiss banks have further added to concerns across the market. Uncertainties continue to weigh on investor sentiment as markets worry about financial stability. Elevated inflation persists, give we are currently operating in a period of energy and commodity-supply shortages. These are being driven by the Russia-Ukraine situation, tight labour markets, and disrupted supply chains – albeit inflation has moderated since the summer of 2022.
  • Although the issues these banking entities face are likely company specific, given they are highly concentrated in industries with significant funding, regulatory, or legal pressures, possible impacts on confidence and the availability of credit are likely to be seen, given unrealised losses on bank fixed-income portfolios. We do not see this event as a systemic challenge to the banking system. However, it largely depends on two key questions: 1) whether the liquidity backstops put in place by the Fed and the Swiss National Bank prove sufficient, and 2) how far contagion from the US regional banks and Swiss banks’ spreads.
  • Even though the data has moderated in the past few months, inflation was still elevated in February. In the US, headline CPI inflation came in at 0.4% MoM, 6.0% YoY (from 0.5%, 6.4%), but core CPI inflation was sequentially a bit hotter at 0.5% MoM, 5.5% YoY (from 0.4%, 5.6%). Shelter inflation drove 70% of the CPI’s gain in February, but momentum should slow significantly. CPI inflation data is not cold enough for a “pause” but also not hot enough for more aggressive hikes. Given the recent bank failures, the Fed and other central banks have lost the luxury of focusing solely on the fight against inflation. However, the Fed remains hawkish, raising the target range for the Fed funds rates by 25 basis points (bps) to 4.75% to 5.0% at the March FOMC meeting. The bond market has priced in no more hikes this year, expecting the Fed to hold for May and June before cutting by 25 bps in July, September, November and December.
  • The odds of a recession remain high, given tighter lending standards. The shutdown of regional banks has reinforced our base-case expectations for the U.S. economy. We continue to expect growth to slip into negative territory around Q4 2023. The impact of Fed tightening typically takes some time to hit the real economy. Most of the world’s advanced economies — including the US, Eurozone, UK and Canada — are expected to slow in 2023. The US Leading Economic Index fell to -6.5% in February. This level is usually only seen prior to recessions.
  • Our broad asset allocation is tilted towards defensive, quality assets that provide ballast to the portfolios in times of increased uncertainty. The low-volatility, defensive attributes of consumer staples, utilities, and a broad range of dividend names may find some insulation. We also like income-themed portfolios that offer resilience whilst keeping pace with inflation. We are underweight US Equities and more positive on Europe, EMs, Asia and China equities. Europe’s recent macroeconomic data surprises and corporate earnings have been relatively robust. The China reopening narrative has become consensus resulting in a more positive view of Emerging Market equities through trade and tourism. Asia FX will benefit if USD weakens, considering recessionary concerns. Stock valuations are also fairly priced relative to historical levels, which could provide an attractive tactical entry point. However, deteriorating economic conditions and the likelihood of a recession—not to mention its associated impact on earnings—could be headwinds for returns.

Fixed Income / Alternatives

We remain tactically neutral Fixed Income and retain an overall underweight duration stance due to the broadening tightening cycle by numerous central banks. However, growth slowdown dynamics brought about by tightening financial conditions present opportunities to add some duration risk back to portfolios when appropriate. From a curve perspective, we prefer to have a flattener/inversion curve on but will gradually move towards a steepening position. 

  • The Fed has reaffirmed its focus on high inflation readings as it rapidly adjusts its restrictive policy setting. It has raised  the Fed funds rate up to 4.75%-5%, the highest level since 2007. We believe a further 25 bps of tightening is expected for the remainder of 2023, according to the forecast revealed by the Fed’s dot plot. However, the bond market is pricing in no more rate hikes and even rate cuts towards the end of the year – the latter we feel is too optimistic. In light of the current banking turmoil, questions remain about the extent of de-facto tightening coming from tighter lending standards and, thus, how much further central banks will need to hike via conventional interest rate policies. Global central-bank tapering and rate hikes in developed markets (DMs) and EMs will likely worsen global liquidity conditions. Yields have continued to increase – albeit there has been a recent softening of peak terminal rate expectations.
  • China markets pulled back on concerns about risky fixed-income exposures after the two Swiss banks’ merger. China strives to maintain an accommodative monetary stance and is prioritising economic growth. The Chinese government has announced its first reserve requirement ratio (RRR) cut this year by 25bps for all banks (except for those with an RRR of 5%) and rolled out a series of supportive measures for the real-estate sector to ease onshore debt financing risk amongst property developers and improve their liquidity profiles. The policies have been deemed positive to reduce property-sector headwinds, but we think the property market fundamentals will take time to recover. It is also vital to monitor the effective implementation of these measures and any recovery in physical market sales.
  • Overall, we retain an underweight duration stance due to the broadening tightening cycle by numerous central banks. However, whilst concerns about persistent inflation continues to build, growth slowdown dynamics, brought about by tightening financial conditions, will eventually present opportunities to add some duration risk back to portfolios. We hold a near-term neutral view on the US dollar (USD) but expect it will weaken on US recessionary concerns.
  • We are overweight US Government Bonds/Treasuries, which act as safe-haven assets in times of market volatility, especially during a recession. US investment-grade credit and higher-quality bonds are rated relatively neutral, given their increasingly attractive yield profiles and the solid fundamentals of the underlying securities. We remain underweight US High Yields given its peaking fundamentals, expectations for higher defaults and limited value/compensation for these risks. Outcome-oriented portfolios, particularly those generating a high income, will still need to clip yield from the asset class, although the risks will remain monitored. We remain neutral DMs ex-US debt, as the asset class could provide relatively attractive returns on a currency-adjusted basis. Still, risks remain, as policy normalisation will push their rates higher, bringing headwinds to bond markets. We also remain slightly positive on EMs debt, which has been negatively impacted by last year’s USD strength but has proven increasingly resilient and poised for outperformance, given how EM central banks have navigated this tightening cycle. The asset class continues to provide an attractive yield profile. However, possible continued/short-term USD strength and cooling growth in developed economies could suppress the global manufacturing impulse.
  • We are constructive on Alternatives over the short term, given their attractive yields, dividend prospects, diversification effects and inflation-hedge characteristics, which provide a low correlation to volatile markets. Agricultural commodities remain well supported as geopolitical factors and operational challenges constrain key grain exporters. The recent declines in listed infrastructure valuations provide compelling entry points amid improving forecasted returns.


Cash has been a relatively attractive asset class in the short term when measured against a complex economic backdrop of increasing market volatility and geopolitical uncertainty. We are transitioning towards the peak of the rate- hike cycle and of the view that the inflation is peaking. From a forward-looking perspective, cash yields might reduce, and the attractiveness of fixed-income assets increase as price return may improve given lower rates later.

Quarterly Fund Managers’ Views

Below market views are provided by the respective fund house.


Healthcare’s resilience throughout the economic cycle

2022 proved far more turbulent than expected. Multiple adverse events impacted global markets and the economy as they continued to grapple with a persistent COVID environment. Central banks were forced to pivot to aggressive monetary tightening, which weighed on investor sentiment and triggered mounting fears of a global economic recession.

There were few places to hide in this challenging environment, as broader equity and fixed-income markets experienced steep losses. Yet, the healthcare sector offered relative protection during the drawdown, once again proving itself a defensive stalwart for investors.

The sector’s defensiveness stems from the supply-and-demand dynamic of healthcare products and services. While cyclical industries usually experience a sizable reduction in demand during economic downturns, healthcare demand generally remains resilient, with consumers having an inelastic appetite for biopharmaceutical products, medical goods, and services. This was even more pronounced during the COVID-19 pandemic, with many healthcare products and services experiencing a surge in demand. While it’s uncertain whether we will see a major global economic recession in 2023, we believe the healthcare sector to offer investors a relatively safe place for their capital if a recession ultimately occurs.

Opportunities for innovation strengthened by the COVID pandemic

In recent years, COVID-19-related advancements have been the focus of the healthcare landscape.

The remarkable response of the healthcare industry to the pandemic has generated incremental returns due to sales of the vaccines, diagnostics and therapeutics mentioned above. As anticipated, many of these companies have, in turn, reinvested excess cash flows to augment their discovery capabilities, capital spending, and pipeline investments, thus compounding further advances in non-COVID unmet medical needs. As we transition to a post-COVID environment, we expect innovation to accelerate across the sector and believe it is poised to reap the rewards of these incremental investments.

Secular trends warrant a long-term allocation to healthcare companies

We believe that new modalities in treatment and prevention will continue to drive long-term governmental outlays toward healthcare products and services. Irrespective of the incremental tailwinds and headwinds associated with COVID-19, the underlying secular trends of ageing demographics, medical advancements, and profound unmet medical needs continue to support long-term exposure to global healthcare companies in a well-balanced investment strategy.


We saw energy commodity prices fall towards the end of last year as concerns over supply shortages for oil and natural gas were overtaken by deteriorating sentiment around short- to medium-term demand trends. Natural gas prices on both sides of the Atlantic fell considerably. While recessionary fears are well-founded, from current price levels we are constructive on oil and natural gas prices.

Continued supply disruption at many mines and the abrupt re-opening of China have changed the metals outlook dramatically in the past few months. We are more cautious about the second half of the year as there is a risk of demand falling in the US and Europe, just as supply could start to increase. However, if China’s pick-up is stronger than anticipated, this could easily overwhelm any Western weakness.

The world avoided a grains shortage in 2022. In aggregate, we still expect robust demand for agricultural inputs in 2023 as farmers aim to increase output by raising planted area and applying full dosages of crop protection and fertiliser products to maximise yields. Affordability has improved, with prices of fertiliser but also crop protection and other inputs having come down late last year.

Looking forward into 2023, we are constructive on gold prices. Inflation is likely to moderate, leading to the Fed slowing and even reversing rate increases. This could lead to a weaker US dollar, therefore helping gold prices to hold current levels or even rise. At current levels, gold-mining stocks look attractive on both valuation and fundamental grounds. We retain conviction in our view that, the future being inherently uncertain, gold and gold equities remain a valuable hedge over the long-term, with the latter paying an increasingly attractive income.

In Hong Kong, this Document has not been reviewed by the SFC. Issuer: Ninety One Hong Kong Limited.

This Document is provided for general information only. Nothing herein should be construed as an offer to enter into any contract, investment advice, a recommendation of any kind, a solicitation of clients, or an offer, marketing or solicitation with respect to any particular strategy, security, derivative, services or investment product. The information may discuss general market activity or industry trends and is not intended to be relied upon as a forecast, research or investment advice. The economic and market views presented herein reflect Ninety One’s judgment as at 28 February 2023 and are subject to change without notice. Views and opinions presented herein will be affected by changes in interest rates, general market conditions and other political, social and economic developments. There is no guarantee that views and opinions expressed will be correct and may not reflect those of Ninety One as a whole, different views may be expressed based on different investment objectives. Although we believe any information obtained from external sources to be reliable, we have not independently verified it, and we cannot guarantee its accuracy or completeness. Ninety One’s internal data may not be audited. Ninety One does not provide legal or tax advice. Reliance upon information in this material is at the sole discretion of the reader. Investors should consult their own legal, tax and financial advisor prior to any investments. Past performance should not be taken as a guide to the future. Investment involves risks; losses may be made.

Except as otherwise authorised, this information may not be shown, copied, transmitted, or otherwise given to any third party without Ninety One’s prior written consent. © 2023 Ninety One. All rights reserved. Issued by Ninety One.

Fixed Income

In mid-March 2023, the closure of three US tech-based regional lenders triggered a fresh wave of global banking concerns. In response to the US and European banking concern, the financial authorities in Europe and the US are taking proactive measures to stabilize markets. The Fed made additional funding available to local depository institutions 1 and coordinated with five other central banks to enhance the provision of US dollar liquidity.2  Elsewhere, the Swiss government facilitated the merger of a financially troubled big bank and the country’s largest bank with additional funding support. Despite these moves, financial markets remain volatile, with preferred securities under pressure due to risk-averse investors.3

Outlook for the current banking crisis

Looking ahead in the US, we anticipate more potential issues in other smaller or lower-quality banks coupled with further banking regulation. Moreover, we believe these banks could feel the pain of potential downgrades in their credit ratings and sector outlooks by the ratings agencies.

Given this backdrop,  we believe the large, diversified banks are also potential beneficiaries. These institutions are experiencing significant deposit inflows that will potentially aid their financial positions and credit ratings. In Europe, the Swiss bank merger triggered a broad-based sell-off of the AT1 bonds,4 given the proposed deal included a complete write down of a financially troubled bank’s AT1 bonds.

Amid evolving banking issues in US and Europe, as well as fragile market sentiment, we believe CoCos will continue to underperform other preferred securities.

Effective risk management avoids significant losses

During uncertain times, risk management is even more critical. By leveraging our on-the-ground expertise, we work closely with our Risk Management, Credit Research, and Bank Equity teams to review every position in the Strategy, seeking opportunities up and down the capital structure.  Immediately before the collapse of the first US regional bank, our risk team warned about the potential risks associated with that bank’s securities. Therefore, we avoided investing in its newly issued mandatory convertible preferreds.

Remain favors to utilities 

We believe the Strategy’s defensive positioning (adopted in 2019) is helping investors to protect against downside amid the market volatility. We remain favours to utilities as the return on equity from these names typically increases when growth slow and inflation rises. These companies are highly regulated, with little economic sensitivity attached to their earnings.

Well-positioned for a volatile market with potential attractive yields

The recent volatility has provided investors with opportunities to gain exposure to fixed-income investments. Compared with other alternatives in this space, preferreds are a higher-yielding, lower-risk option. Following the recent correction, preferreds are now trading at substantial discounts to par – these are levels not seen since the Global Financial Crisis in 2009. Furthermore, preferreds have risen far above their 10-year highs in terms of yield.5

Investors now expect the US Fed funds rate to peak in May, followed by approximately three rate cuts in the second half of 2023.  When, as expected, the Fed makes a rate hike pause or hints at a pivot, we believe there will be a rebound in preferred securities, given these assets often thrive in a flat or falling rate environment. In turn, this could potentially deliver attractive total returns (income + price) to investors.

With attractive yields, a focus on high-quality names, active duration management, holistic risk management, our overweight exposure to the defensive utilities sector and greater investment flexibility, we believe the Strategy’s approach should be able to navigate currently volatile and fast-changing markets while generating potential excess returns as US interest rates stabilized.

1 Source: US Federal Reserve, 12 March 2023.

2 Source: US Federal Reserve, 19 March 2023. The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank coordinately announced to enhance the provision of liquidity via the standing U.S. dollar liquidity swap line arrangements, by increasing the frequency of 7-day maturity operations from weekly to daily. The new operations started on 20 March, 2023, and will continue at least through the end of April.

3 The Swiss National Bank (SNB) and the Swiss Financial Market Supervisory Authority (FINMA), 19 March 2023.

4 AT1 bonds are also known as Contingent convertibles securities (CoCos), which are debt instruments mainly issued by European banks. Part of, or the entire security converts to common equity if capital level of the bank issuer declines to levels below regulatory standards, or regulators deem a bank issuer at risk.

5 Bloomberg and Manulife Investment Management, as of 23 March 2023. The yield to maturity for preferred securities (reference to ICE BofA US All Capital Securities Index) reached a 10-year high of 8.22% in March. This was above the 10-year average of 5.48% as of 24 February 2023.

Market Review 

After a strong start to the year for credit, total returns turned negative in February driven by rate volatility on the back of strong labour market and retail sales data.

The Federal Reserve hiked rates by 25bps at the beginning of the month while the ECB raised rates by 50bps.

European investment grade spreads tightened marginally, while US investment grade spreads ended the month slightly higher. High yield outperformed investment grade both in the US and Europe. However, total returns were broadly negative as government bond yields climbed.

The US 10-year yields rose from 3.51% to 3.92%, with the two-year rising from 4.21% to 4.82%. Germany’s 10-year yield increased from 2.29% to 2.65%. The UK 10-year yield rose from 3.34% to 3.71% and two-year increased from 3.46% to 4.07%. 

The US dollar gained ground in February, with the currency outperforming most G-10 peers.

Outlook and Strategy

Looking forward, we remain of the view that credit offers investors good value, both in terms of improving income streams and the potential for attractive returns. 

Having said that, markets have the potential to stay choppy with inflation remaining higher than expected.

Overall, credit still appears to provide attractive compensation for risk, as corporate fundamentals look broadly robust and the default rate cycle is expected to be shallow.

Market dispersion is looking healthy. Careful bond issuer selection will be important, particularly looking for issuers with cash flows rising with inflation, or whose business models are resilient to a slowdown.    

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The closure of three U.S. tech-focused lenders has sent shock waves across financial markets. We believe the recent developments in the U.S. could be seen as being idiosyncratic rather than systemic in nature and may even create investment opportunities for a globally diversified, income-oriented approach.

What we thought about the recent events

While we continue to monitor this fluid situation, the development could be seen as idiosyncratic.  

We believe there is no over-arching systemic risk to the banking industry. There may be some other company-specific missteps ahead, which we believe could be fueled by a lack of confidence rather than the toxic assets on banks’ balance sheets that caused the banking crisis of 2007/2008. Banks are better capitalized, whilst losses we see today are due to a duration mismatch rather than due to valuations or owning questionable assets. Having said that, some banking names may experience increasing difficulties, given the performance of their securities portfolios as weak sentiment by depositors challenging banks to fulfil withdrawal requests. The team remains vigilant, monitoring our exposures to banking names and focuses on high quality names.

How being globally diversified is working

In running the GMADI portfolio, our portfolio management teams consciously maintain an income-focused and low-volatility profile. This is the result of the Strategy focusing on a globally diversified portfolio across fixed income (investment-grade bonds, high-yield bonds, preferred securities) and equities (including REITs) and option-writing which, when interacting together, help minimize the concentration risks associated with geography-specific or single asset class exposures. This global diversification strategy also allows our investment managers the flexibility to move across the capital structure, sectors, geographies, and asset classes as market developments unfold. 


As investors progress through 2023, the debates continue around whether they (especially income investors) should add some risk with exposure to growth assets, or to remain anchored to a more balanced, diversified approach with less dominating style biases.

We expect a higher-for- longer-rate backdrop with persistent inflation. It’s likely that growth-oriented portfolios, that are more sensitive to rates, will likely underperform the lesser growth-oriented portfolios should the current environment persist.  

We believe that a more balanced style with both growth and natural-yielding income objectives is relevant in this current macro environment because:

  • A blended style that has permission to adjust towards value or growth can benefit across changing market regimes.
  • Income-oriented strategies typically have relatively defensive attributes and remain relevant in the current challenging growth outlook.
  • Exposure to income-generating securities can offer portfolio resilience during periods of market volatility.
  • Tactical allocation to growth assets is still possible in response to changing market regimes.

Our global multiple asset diversified income strategy continues to take a diversified and income-oriented approach whilst managing risk. We believe maintaining a low volatility and income profile is suitable for investors as they navigate the current uncertain macro and market environment.

2022 saw significant monetary policy tightening in developed markets as central banks raised rates in the face of rising inflation driven by higher energy prices, supply chain issues, and strong demand. We believe this monetary tightening will eventually lead to a slowdown in economic growth, and possibly a recession in some regions, as high inflation and higher interest rates increases the cost of capital for companies, and they cut back on investment and employment, which erodes consumer confidence as real wages and consumption fall.

We don't think risk assets such as equities and credit, especially in developed markets, have priced this in, and we expect spreads to widen and earnings to fall which will lead to a correction in risk assets. Therefore, we remain cautious to risk assets. Within equities, we continue to favour quality dividend, a style which offers good downside protection in weak markets, although it tends to fall behind in sharp rallies. We do think that government bonds and investment grade credit offer some protection against this economic outcome, especially in the US and UK, where we are seeing the potential to generate income, as well as capital appreciation, to offset weakness in risk assets.

We continue to find opportunities, especially in emerging markets and China, which are at a different part of the monetary and inflation cycle. We think the prospects for emerging markets over developed markets continue to look favourable. This outlook is supported by the continuing recovery in China as the reopening following the removal of zero- covid policy continues to gather pace, and the government implements pro-growth policies. As the consumer in China starts spending again, this will benefit domestic companies' earnings and subsequently other markets, such as ASEAN and Japan, from increased trade and tourism. A potential for the dollar to stabilise or even weaken from here is another tailwind for emerging market assets.

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1 Source: Multi-Asset Solutions Team (MAST) in Asia, as of April 2023. Projections or other forward-looking statements regarding future events, targets, management discipline or other expectations are only current as of the date indicated. There is no assurance that such events will occur, and if they were to occur, the result may be significantly different than that shown here. 

Disclaimer – Quarterly Asset Allocation Views

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Disclaimer and Important Notice - Quarterly Fund managers’ Views

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