As a financial planning principle, it is always suggested to diversify one’s investment across different asset classes such as equity and debt. As the correlation, between equity and debt, is low, their prices move largely in opposite directions. So, when debt price falls, equity sees a rise and vice versa. However, in 2022 this principle did not hold water and both equities and bonds tumbled. Those investors holding a 60/40 portfolio (comprising 60% equities and 40% bonds) ended up with notional losses by the end of 2022.

But wait! Before you restructure your portfolio for 2023, take a close look at what Hou Wey Fook, Chief Investment Officer, DBS Bank has to say in the DBS 1Q23 CIO Investment Outlook entitled ‘The Return of 60/40’.

Very rarely in the history of financial markets have we seen both equities and bonds correcting so acutely and in tandem as what we’ve observed in 2022. However, with bond yields soaring above 5% and equity valuations having mean-reverted, the turn of the year presents a great starting point for investors to return to a traditional “60/40” portfolio.

Heading into 2023, a strong labour market and absence of systemic imbalances in the US suggests that a recession, should it transpire, will be mild.

Meanwhile, CPI data and Fed rhetoric suggest a moderation in policy tightening, with yields poised to retrace.

Faced with the twin challenges of rising recession risks and still sticky inflation, we favour bonds over equities, considering the historical outperformance of bonds in a high-inflation/ low-growth environment, and the currently wide bond-equity yield gap.

Also Read: S&P 500 to fall for the second year in a row or end 2023 with gains?

Within the 60/40 portfolio, we look to DM IG ( Developed Markets Investment Grade) credit for safe, liquid income generation, and have upgraded DM IG corporate bonds to Overweight in view of their generous yields and well-managed credit risks.

In the equities space, the impact of subdued earnings forecasts due to recession risks will likely be partly offset by valuation expansion in an environment of falling yields. We maintain our preference for US over Europe in DM equities, while seeking opportunities in China’s reopening. We continue to look towards alternative investments such as gold and private assets as portfolio risk diversifiers in a volatile investing environment.

Also Read: Fed minutes reveal no rate cuts in 2023, economy headed for recession

US markets are marked with cautious optimism as investors await the transmission of the Fed’s monetary tightening through the economy. Significant divergence is expected at a sectoral level – we have downgraded Consumer Discretionary and Materials in expectation of moderation in domestic consumption and economic momentum.

Across the Atlantic, the outlook for European equities remains cloudy given high inflation and tight monetary conditions, necessitating an Underweight view of the region. Nonetheless, bright spots can be found within the Pharmaceutical, Luxury, Energy, Technology, and Industrial sectors, in resilient companies with underlying strength.

After a dismal showing in 2022, as China struggled to navigate its strict Covid measures, our expectations of a measured reopening are playing out. We reiterate our constructive view on China given positive government measures alleviating Covid-Zero policies, real estate sector challenges, and economic goals as predicted. The timing has materialized to a dollar-cost average down – we are constructive on domestic-oriented sectors at the forefront of the reopening ripple, e.g. A-shares, New Economy and e-Commerce platforms, China consumer brands, and beneficiaries of government fixed asset expenditures.