Our multi-asset investment views – August 2022 – US


A humiliating month for our negative view of stocks. Although company earnings are weaker, overall earnings have been generally resilient.

We have returned to a negative view. The market appears to be underestimating the lingering effects of inflation and valuations at current levels are hard to justify.

Having been positive on commodities for the first half of 2022, today we maintain a more balanced view with supply constraints offset by weaker demand.

Given concerns about stagflation, our outlook remains cautious, with a preference for US over European credit. Valuations are fair now, so the focus is on growth from here.

The US was previously our preferred market to be underweight. However, we have upgraded this view to neutral as recession fears have traditionally been more supportive of US equities compared to other regions, due to the higher proportion of higher quality companies in the index.

Weaker demand is becoming a problem for energy companies in the index.

The European Central Bank (ECB) recently raised interest rates for the first time in a decade to combat runaway inflation. We believe this will have an impact on share prices, particularly if the focus turns to winter power supplies.

We have lowered our view as recession fears are rising and Japanese equities could weaken due to the cyclical nature of the index and the recent rally in the yen.

We lower our view to negative as emerging market equities traditionally do not perform well during recessions.

China was previously our preferred region, but disappointing stimulus initiatives from the country’s government and valuations that no longer look cheap have led us to downgrade the region.

We maintain our negative view due to rising geopolitical tensions in the region, particularly in Taiwan.

We downgraded to negative because duration — which measures how much bond prices are likely to change if interest rates rise — has become costly and is no longer useful for diversifying stocks. Our negative view focuses on the short and middle areas of the yield curve (the relationship between time to maturity and interest rate).

We remain negative as with inflation still on the rise, there is room for the Bank of England (BoE) to raise interest rates.

We remain negative on German bunds as the European Central Bank (ECB) has been slow to raise interest rates despite rising inflation.

Our view has not changed as returns for investors remain unattractive compared to other markets. Slowing global growth also remains a risk.

We have risen because we believe the market has not fully priced in inflation expectations and is too confident that the Federal Reserve (the US central bank) will bring inflation back down to 2%.

Our view is negative with stagflation and recession risks rising, leaving emerging market bonds vulnerable.

Investment Grade Credit

Using fair value valuations, we have upgraded our view as US growth remains firm and US investment grade yields have stabilized.

We have lowered our opinion as the region is expected to see a relatively aggressive slowdown.

We remain positive as emerging market fundamentals look strong and the region has priced in European risks.

High yield bonds (not investment grade)

We have upgraded our view as spreads (the difference in yields between bonds of similar maturity but different credit quality) have started to stabilize and sentiment has improved, with high yields outperforming investment grade.

Growth prospects in Europe are less favorable than in the US Uncertainties about gas supplies to Europe next winter mean the risks are more significant.

We remain neutral as energy is the sector most vulnerable to supply problems, with natural gas supplies stretched to the limit, particularly in Europe. Although the slowdown phase is historically negative for demand, current supply problems are proving to be favorable.

Gold tends to do well when recession fears loom, and despite the market crash in July, gold prices appear to have recovered.

Demand outside of China remains uncertain, production remains off and inventories are low, which could cushion risks.

We have moved down to neutral as input costs have started to decline and we think we may finally have peaked in fertilizer and feed prices.

We continue to favor the US dollar as we believe it is too early to expect the Fed to change its current aggressive rate hike stance. Against a backdrop of weakening global growth and falling equity prices, the US dollar remains a safe haven currency.

The turn of the cycle and the worsening of the stagflationary environment, added to the political instability, have weighed on the currency. The pound appears to have adequately priced in these factors, leaving us neutral.

While the outlook for growth is not positive, we believe that the current extreme levels of negative sentiment mean that there is potential for a tactical bounce in the currency. Therefore, we move our sight back to neutral.

We remain negative. The depreciation of the (offshore) renminbi is likely to continue, which should cushion the impact of reduced demand for Chinese exports.

We have taken a negative view on the Japanese yen for now as the Bank of Japan (BoJ) policy remains unchanged. However, some positive opportunities may arise in the fourth quarter following the appointment of two new BoJ members in July who are in favor of higher interest rates.

We remain cautious on the Swiss franc after the Swiss National Bank unexpectedly raised rates.

1 Global emerging markets include Central and Eastern Europe, Latin America, and Asia.

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