House View, August 2022
Asset Allocation. We remain neutral on equities overall given current geopolitical tensions and intensifying margin pressure. At the same time, while we expect further volatility ahead, we recognise that a lot of bad news has already been priced into equities this year. An easing off on monetary tightening could well limit further downside for stocks, while the Q2 earnings season (and guidance) in the US has generally not proved as bad as feared so far. Companies showing strong fundamentals should continue to shine in what remains a stock picker’s market. Within our overall neutral stance, we are overweight Swiss and Japanese equities, as well as equities in China (which are benefiting from strong policy support).
We also remain neutral core US and euro area government bonds. Despite hefty rate hikes from the European Central Bank (ECB) and US Federal Reserve, bond yields and expectations for policy rates have been coming down as economic concerns mount. We are of the view that political uncertainty in Italy of itself will not be enough for the ECB to activate its new ‘Transmission Protection Instrument’ (TPI), designed to limit spread widening. We remain underweight euro periphery government bonds. While cautious on corporate bonds overall, we have a preference for US investment-grade over high-yield bonds as we seek to capture ‘safe’ carry.
Global Economy. The US recorded negative annual growth for the second quarter in succession in Q2, meeting the common definition of a recession. Despite notching up quarter-on-quarter GDP growth of 0.7% in Q2, things could become even tougher for the euro area as it grapples with energy supply issues. The recent downturn in business surveys gives an idea of the challenges facing the world economy at large. The good news is that inflation may have peaked in the US in Q2.