House View, May 2022
Asset Allocation: We believe an active management approach is more imperative than ever. We continue to exploit volatility and like the currencies of stable, commodity-producing countries such as the Norwegian krone and Canadian dollar. Our preference in equities goes to 'pricing power' companies capable of withstanding margin pressure. We retain overweight positions on the Swiss and Japanese equity markets - the former because of its defensive characteristics, the latter for its relative cheapness.
We remain neutral US Treasuries, believing that long-term rates may subside later this year. We are overweight Chinese government bonds as real yields remain attractive and we believe renminbi weakness will be contained. We are underweight euro credits and US high yield but neutral US investment-grade credits, which should withstand rate funding pressure better. We maintain our interest in US senior leveraged loans and see real-estate vehicles, including REITS, as protection against inflation.
Macroeconomy: The economic cycle is being impacted by tighter monetary policy, an energy crisis and a Chinese economy whose prospects are clouded by the authorities' zero-covid policy. As a result, liquidity is shrinking and leading indicators are pointing towards a global slowdown.
We now believe a 50 bp hike by the Fed in May could be followed by one of similar magnitude in June. We are slightly reducing our 2022 GDP growth forecast for the US to 3.0% due to the effect of rising long-term rates and are raising our 2022 forecast for the US consumer price index to 7.6% (from 6.6%).
We are sticking to our euro real GDP forecast of 2.8% this year, but risks are clearly tilted to the downside, while we now think the European Central Bank will start to hike rates in September. Our GDP growth forecast for China stands at 4.5%, but also with a downward tilt.
Currencies: With the Bank of Japan sticking to its yield-curve control policy while the Fed hikes rates, the yen has fallen to multi-decade lows. Similar central bank dovishness (as well as an uncertain economic outlook) explains recent renminbi weakness. Both currencies still look vulnerable - although we could expect the People's Bank of China to act to contain currency volatility. In the meantime, we are monitoring the spill-over from renminbi weakness to other emerging-market currencies.
Equities: While Q1 results show earnings remaining resilient overall, equity indexes have been pulled down by falling valuations. This can be traced back to the rise in government bond yields, which has weighted on growth-stock indexes like the Nasdaq in particular. Alongside our overweight positions in Japanese and Swiss equities, we remain neutral on the US and euro area, but remain conscious of the risks overhanging equities in both places.
The Fed's hawkishness and a strong US dollar have been weighing on the performance of emerging-market (EM) equities. With question marks over global risk appetite, we remain cautious on EM stocks, including stocks in China. Sector wise, while there is every reason to favour defensive sectors in current conditions, one should not neglect the opportunity for leading growth companies to maintain their earnings multiples in the face of an economic slowdown and to extend their market dominance.
Private Equity: While a decline in deal activity for growth companies may progressively make itself felt in private markets this year, activity in early-stage deals remains strong. Private-equity investments should continue to benefit from fundamental shifts in tech and health care.
Fixed Income: While we see the Fed raising rates by 50 bps in May and again in June, our central forecast if for the US central bank to mark a pause in September. Despite the near-term volatility, we remain neutral US Treasuries, believing we could see long-term US yields ease somewhat by year's end.
While the environment remains challenging for credit overall, senior US leveraged loans have held up relatively well. As long as recession is avoided, they could continue to perform.