A just-published report revisited our theme of toppling dominoes in response to rising interest rates, and related investment opportunities – both long and short. The surge in the global cost of capital has dampened growth conditions but is unlikely to trigger a global recession that resets the economic cycle and/or sustainably dampens inflation toward central bank targets. Investors will need to remain tactical in this macro environment and continue to discriminate among assets based on their interest-rate sensitivity. The good news over the short term is that the rioting in global bond markets has calmed and, thus, there are good chances for the budding risk-on phase to continue.
The end of the “free money” era burst the bubble in cryptocurrencies and innovation stocks. Post-mania crash phases are typically followed by extended volatile consolidations, or “revulsion” phases. The froth in U.S. growth stocks is also being removed in stages. The surge in bond yields threatened the “bulletproof” perception of these stocks, and earnings disappointments will remain a headwind. We are underweight/short these stocks versus their value counterparts.
Moreover, the “weak link” economies with housing and credit bubbles are increasingly vulnerable to deleveraging forces. Thus, we continue to avoid/short these equity and currency markets, and the report provided several pair trade recommendations to express this theme.