The market has found a near-term bottom, as overall liquidity and financial conditions have improved over the last few months. With the help of new inflows and institutional rebalancing, we could expect a rebound in equities in the short term.
While we are not yet out of the woods, the trend growth in inflation is changing in the right direction. According to the nowcast model, the PCE and CPI for March could surprise the downside, raising some hopes that the inflation problem is behind us. Compared to last year, the upcoming numbers (due to the base effect) could easily show negative inflation growth, thus giving investors the green light to take more risks.
As many institutional investors are still underweight in equities, at some point, they will have to chase the market to keep the risk level in line with the stated objectives. In addition, there is also a substantial short position on U.S. treasuries that could unwind under the positive inflation data. This could lower long-term yields and raise valuation multiples for the overall market, especially growth stocks $IWF .
We have moderated our short exposure but will keep some of it to sustain the portfolio's medium-risk exposure. At this stage, holding a slightly higher exposure to the equity market is optimal. However, it must still be balanced with the assets that perform well in higher volatility regimes.
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