Now that central banks have clarified their goal – which appears achievable for the Fed and highly likely for the ECB – and if inflation subsides over the next few months, the environment will be particularly conducive to a strong bull market. With this in mind, we are optimistic over the mid-term.
However, in terms of timing, we prefer not to position our portfolios too early as:
- Short-term rates have factored in the Jackson Hole statement rather effectively, but maybe not fully. Markets might continue to correct as the perception of a durably restrictive monetary policy may wellincrease the likelihood of a recession for investors.
- The Fed’s quantitative tightening – the effects of which are unclear but potentially negative for markets – will see its intensity rise two-fold in September.
- We are entering a phase of downward revisions to earnings forecasts.
Our short-term cautious stance is nevertheless expected to be limited and will be revised in the very near future, as the situation evolves.
EUROPE LACKS VISIBILITY BUT SHOULD NOT BE UNDULY UNDER-WEIGHT
Energy bills and inflation will rise significantly as the price of gas surges in Europe. The extent of the shock is such that forecasts on European economic growth have been put on hold. The decline of the euro, partly caused by the European energy crisis, is putting the ECB under pressure, and increasing the risk of a recessive trend in monetary policy.
The key problem for investors is that the current challenge for Europe can be summarised as one single factor: the price of gas – which is both highly political and highly volatile. European assets have factored in a great deal of negative news but have not incorporated the scenario of a severe recession.
We therefore prefer to underweight European assets (equities, high-yield bonds), but only to a limited extent. We feel the situation can turn around very quickly and staying away from these listed markets would be costly.
Within equity markets, we appreciate healthcare, which is resilient in periods of economic slowdown, and Big Data.
Finally, the very strong run enjoyed by the Indian market has confirmed our long-held faith in this investment theme: India now offers durable growth prospects. The boom of the residential real estate market in the country has supported the long-lasting development of a middle class, accompanied with a high demand for goods and equipment.
