House View, June 2022
Asset Allocation: While froth has been removed from equity markets, valuations are still not especially cheap in a number of sectors, especially given margin pressure and sombre earnings guidance. Outside overweight positions in the Swiss and Japanese markets, we therefore remain neutral on equities globally. We are also overweight hedge funds, especially seeing potential for macro funds to perform given current dislocations.
Clouds on the economic horizon have led us to shift our position on global bonds from underweight to neutral. Already neutral US Treasuries, we are now neutral on core euro bonds as well, with less dissuasive yields encouraging us to move from underweight. But we are more cautious than before on US leveraged loans and Chinese government bonds. We remain attentive to opportunities in volatility and overweight liquidity and are turning more positive on the potential for select emerging-market currencies.
Macroeconomy: While the oil supply situation has seemed to improve of late (in part due to Chinese shutdowns) and we believe Brent oil could settle at around USD95 per barrel later this year, big rises in refined fuel prices could continue to feed market unease.
We expect the US Federal to deliver two additional 50 bp rate rises in June and July, but we think it will mark a pause thereafter to assess the impact of steadily tightening financial conditions. We have reduced our 2022 GDP growth forecast for the US from 3.0% to 2.8%.
Likewise, we are reducing our 2022 GDP forecast for China – from 4.5% to 4.0% – believing any forthcoming rebound will be comparatively modest. Broadening inflation pressure means that the ECB will raise policy rates in July by at least 25 bps. We have cut our GDP growth forecast for the euro area this year to 2.5% (from 2.8%).
Currencies: Among low-yielding ‘defensive’ currencies, the Swiss franc’s immediate prospects look brighter than the yen’s as the Swiss National Bank paves the way for monetary policy ‘normalisation’ while the Bank of Japan shows no signs of becoming less dovish. But as the growth outlook darkens, the narrowing scope for further rate tightening outside Japan could provide some support to the Japanese currency.
Equities: Despite a late-month revival in performance, we remain neutral on stocks globally. Forward earnings have been revised downward, with the decline in valuations leading us to lower our targets for the full-year performance of developed-market equities.
Emerging-market equities found some breathing room in late May after many difficult weeks, with a break in the steady decline in earnings expectations that followed the invasion of Ukraine. The impact of the gradual re-opening of China’s economy after covid lockdowns bears watching.
Sector wise, certain retailers serving the middle market are coming under pressure from inventory mismatches and the squeeze on real incomes, although the basic business models of premium retailers remain intact. Likewise, under-pressure US home builders should find support from low home inventories.
Hedge Funds: Dispersion and dislocations are giving rise to an increased opportunity set for global macro funds. Systematic macro strategies based on quantitative analysis in particular have been benefiting from volatility across asset classes.
Fixed Income: A strong dollar and sharp rise in US Treasury yields has cast a shadow over the performance of Chinese bonds in US dollar terms. We have shifted from overweight to neutral on Chinese bonds, although higher local yields and an improved economic outlook could attract some foreign investors back again.
Ever more attentive to credit quality as tightening financial conditions affect lower-grade credits, we are sticking to our neutral stance on US investment-grade credits and underweight stance on high-yield bonds in euros and USD alike