Given that the current downturn is truly global, the marked gap between the optimism among equity analysts and the caution voiced by economists is striking. We also do not follow the market’s belief that central banks will soon throttle back on raising interest rates given the flow of poor economic news. Can the end of their rate rising cycle really be already in sight?
Not for us. Inflation is unlikely to evaporate quickly enough. The Ukraine war will likely keep (commodity) prices high; supply-chain bottlenecks will also persist. High house prices will likely keep pressure on rents. Wage demands are rising in response to a tight labour market and high inflation.
We expect it will take more central bank tightening, and a bigger contraction in growth, before inflation falls to anywhere near policymakers’ targets.
Our multi-asset portfolios are cautiously positioned.
We made four changes to portfolio positioning:
• We upgraded credit to ‘favour’, looking in particular at European investment-grade
• In European duration, we tactically deepened our short position give the likelihood of fiscally-led responses to the gas crisis
• We deepened our tactical exposure to commodities in the face of factors such as resource nationalism, greenflation and support from an easing Chinese macroeconomic policy
• We sold our modest emerging market exposure in equities, while keeping our Chinese and Japanese exposures against a broadly offsetting European short.
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