Why this money manager is betting bonds over stocks this year

Bonds over stocks this year is the way to go, says our call of the day from Nadège Dufossé, global head of multiasset at Candriam, an asset-management company and subsidiary of New York Life.

With stocks, “you are not paid for the risks you take. In the bond market, you have an expected return that is not very high, but you have a lower risk level and certainly your bonds will edge your equity if you have both in a diversified portfolio,” Dufossé told MarketWatch in an interview on Wednesday.

Unlike some, she doesn’t expect six or seven Fed rate cuts this year. Such a path “would mean that the economic growth would be weaker than expected. So if you have some positive surprise on the bond side because you have yields decreasing, you will have negative surprises on the equity side because [earnings per share] growth will be negative and the equity market will go down,” said Dufossé.

In a separate note, she laid out their preference for government debt, such as dollar-denominated debt with currency hedging, and investment grade corporate credit in euros and dollars, as well as emerging-market debt, which should do okay in a world of slowing yet positive growth and a weak dollar.

But the firm is staying invested in equities, where it suggests investors remain nimble enough to catch some entry points and hopefully get their timing right. In 2023, she said the firm began more positive than consensus on stocks, which paid off “because markets were strong at the beginning of the year.”

“But I would say like many investors, we underestimated the upside on equity markets,” going neutral in the second quarter, which was too early said the manager. That was especially true for U.S. tech, where it went overweight early in the year, but then shifted negative too soon, before ending the year at overweight, where it now stands.

“On the bond side, we were OK because we increased the duration at the end of the year,” she said, adding that it also positive on credit, which worked out well.

In terms of EPS growth expectations, she expects U.S. tech stocks will likely keep outperforming, adding that the interest-rate environment shouldn’t be an obstacle for valuations. She also likes defensives, such as healthcare, which was a bet that didn’t work out for them last year, but which is already doing better this year.

It also went positive early on Chinese and European equities, but timed an exit out of those in April and May of 2023, which proved a savvy, she said, but note she’s still not ready to move on China.

“And we are also trying to find an entry point on small caps, but it’s more a matter of timing right because we consider that small-cap valuation is really attractive,” said the manager, of the asset class that suffered “sometimes forced and undifferentiated selling” last year, both in the U.S. and Europe.

“And when all the weakening of economic growth will be integrated in markets, it will be the right time to really buy small-caps,” she said.

Dufossé says for a diversified portfolio, rising inflation “would be the worst-case scenario,” putting bonds and equities at risk for a downturn such as seen in 2022.  “In this case, liquidity and exposure to certain commodities such as gold or energy (oil) should be favored to limit the decline,” she said in a separate note to clients earlier this month.

The markets

Stock futures
ES00,
+0.39%

NQ00,
+0.75%
are rising, with Treasury yields
BX:TMUBMUSD10Y

BX:TMUBMUSD02Y
lower.

The buzz

Earnings are ahead from Northern Trust
NTRS,
-0.40%,
Truist Financial
TFC,
-1.11%,
KeyCorp
KEY,
-0.57%
and Fastenal
FAST,
-0.61%.

Discover shares
DFS,
-0.84%
are sliding on profit disappointment as the credit-card giant also sets aside another $1 billion to guard against souring credit.

Chip maker TSMC
2330,
+1.20%

TSM,
+1.26%
reported a 19% profit drop in the fourth quarter, but beat forecasts. U.S.-listed shares are climbing.

Earnings preview: Netflix’s ad model and sharing crackdown are paying dividends

Weekly jobless claims, the Philly Fed manufacturing survey and housing starts are all due at 8:30 a.m. Atlanta Fed Pres. Raphael Bostic will speak at 7:30 a.m., then later again at 12:05 p.m.

The U.S. Treasury will auction $18 billion of 10-year TIPS, or inflation-protected securities, at 1 p.m.

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The chart

As big tech earnings will start rolling out over the next two weeks, investors are likely to start putting money back into those names, predict Vanda Research analysts, who offer this chart:

They note that data will matter as a worsening risk backdrop could mean more tech stock buying, and in-line data will mean moderate inflows to the sector.

Top tickers

These were the top-searched tickers on MarketWatch as of 6 a.m.:

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