No one ever said removing the punch bowl would come without challenges. Aggressively raising interest rates and withdrawing liquidity from the system (QT) made fender benders / financial accidents even more likely. One externality has been volatility, which if embraced properly is not necessarily a bad thing. Going forward, we must navigate the trilemma between growth, inflation and financial stability. We will continue to do so by relying upon top-down analysis, high conviction security selection, dynamic asset allocation and tactical positioning. As always, we will look to exploit the volatility in the marketplace by planning the trade and trading the plan.

After a challenging 2022 in which we witnessed one of the largest dislocations, in terms of both depth and breadth, we remain constructive on the medium to long-term prospects in our markets. Whereas 2022 was challenging for both sides of the “60/40” portfolio, we believe the 40% fixed income component of portfolios will provide compelling returns both in absolute and relative terms going forward and thus, emerging market debt should be an important return driver of fixed income portfolios. Further, we believe private credit/asset backed lending in emerging markets will continue to provide equity-like expected returns but benefit from strong risk mitigation factors including seniority, credit quality and collateral packages. Lastly, we expect special situations to continue to provide compelling non-correlated returns.

Looking forward, it is hard to imagine an immediate lifting of the global growth, policy and liquidity clouds. The same goes for geo-political uncertainties, the impact of which has also been to contribute to changing globalization. As such, the analytical focus remains centered for now on the continuation of a bumpy journey to a better destination. It is a process in which markets, with time, should better differentiate between credits, thereby providing attractive investment opportunities for long-term investors.

Financial markets enter the second half of 2022 bruised and anxious — bruised by a tightening of financial conditions that, necessitated by high and persistent inflation, is now global in nature and yet far from complete in its full implementation; and anxious as these tighter conditions risk triggering a recession at a time when many countries’ resilience have already been heavily taxed by the battle against COVID.