The first half of the year was marked by the war in Ukraine, geopolitical tensions and economic uncertainties. As a consequence inflation has reached levels not seen in forty years, and there have been a slowdown in the economic growth, which have led central banks to address changes in their monetary policy. As Kevin Thozet, member of the investment committee at Carmignac says, Central Bankers are facing a trilemma consisting of taming inflation, preserving employment, or avoiding financial shock.
On another note, After months of envisioning potential economic scenarios, Stagflationary risks appear widespread, with real growth falling below potential and inflation remaining persistently higher than central bank targets.
We asked Amundi, Capital Group, Carmignac, Nordea, Allianz GI, Vontobel, UBS and Generali Investments to offer us some light on the current situation of the markets, and give us a better idea of where would be best to invest in the second half of the year.
Where to invest this second half of 2022?
|Amundi||– Investors will have to navigate a fragmented world, characterised by slowing growth, rising inflation, and increasing divergences across regions and sectors, where the dynamics of the policy mix will be crucial.|
– Investors should remain cautious about risk allocation and look for resilience and sources of positive real returns.
– In equity investing, value, quality and dividends should be a good combination, as dividends represent a stable component of returns when inflation is high. US equities appear more resilient than EU equities, despite high valuations; while Chinese equities, with the economic slowdown and earnings downgrades already discounted, could afford positive surprises.
– In fixed income, investors should adopt a more neutral tactical stance in terms of duration and play the divergences in monetary policies, as well as look for inflation-linked securities and floating rates to hedge against inflation.
– The era of ultra-low and negative interest rates is over. This will continue to clean up excesses in liquidity-driven areas of the market – Spacs, cryptocurrencies, ultra-growth stocks – and will refocus investors on fundamentals, corporate leverage and earnings. Uncertainty regarding the evolution of the policy mix and on the geopolitical front will continue to keep volatility high, across the board.
– Investors should look for resilience and opportunities that may arise due to a de-synchronised economic cycle and different paths in fiscal and monetary accommodation. Portfolio liquidity will be at the forefront, as global macro liquidity will progressively dry up.
– The ideal is to look for companies that are “in the middle” and that guarantee moderate growth in the coming years. They also indicate that inflation is positive for energy, mining, ICT and real estate companies and, on the mining sector, they believe that these companies are underweight and a good opportunity.
– We can also find interesting opportunities in the healthcare sector, although not in big pharma, but in biotechnology, medical products…
– Optimistic about the technology sector, especially in the case of semiconductor and component companies and software companies.
– In fixed income, the expected return in emerging markets will be very attractive at 7% or 8%, although there will be volatility in the coming years. Fixed income portfolios need to be balanced and a very diversified approach should be taken, with a wide variety of countries and sectors.
– Rapidly pushing interest rates into restrictive territories aims at weighing on economic growth and ultimately weigh on inflation. Which should relatively limit upward movements on long term interest rates. Tightening related concerns coupled with recession fears have pushed. fixed income markets on the brink of dislocation – pushing credit markets at levels which are close to recession levels.
– The first leg down in equity markets came with rising rates which weighed on valuations – and barring a turnaround on the inflation front, they could further derate. But beyond the evolution of multiples, going forward our concerns lie with the evolution of profits and earnings along with the squeeze on margins and the deterioration of economic growth.
– A cautious stance expressed by low level of net exposure to both equity and fixed income markets.
– A core equity portfolio built around defensive sectors such as healthcare and staples. Complemented with an opportunistic selection of Chinese equities and credit names.
– Cash and short-term instruments appear as most suited to sail through episodes of volatility but also provide some dry powder to be deployed more broadly at more attractive valuations, eventually.
|Nordea AM||– The global economy is slowing down and much of this is priced in, but the economic outlook remains uncertain. Analysts are predicting everything between soft landings and recessions. Such a world of dislocated markets and high uncertainty offers tactical and strategic advantages, particularly for secular forces like ESG.|
– While it is hard to predict inflation and growth in a red hot labor market, due to nonlinearities and a lack of historical examples, we sit between different economic scenarios going from decent growth to stagflation or a recession in 2023 leading to volatility in the equity market.
– Large Tech companies tend to price in a long-term economic growth and innovation that is currently challenged. In contrast, Value combined with Quality, is far more realistic (e.g. Coca-Cola, Air Liquide). Chinese Tech is interesting especially under pressure of climate change as the country is the main producer in many parts of Green Tech. As fear recedes of a rapid global economic slowdown, we sense opportunity amid dislocations in some tech/disruption stocks.
– In such a complex world with dislocations and elevated economic risks, flexible solutions with their multiple risk premia should help. Listed infrastructure and real estate should continue to help hedging against inflation as well as the defensive characteristics and alpha capabilities of covered bonds strategies. Such a complex environment is a reminder of the secular value of ESG.
– The ongoing fragmentation of the “global village” is reducing growth as well – but it’s also creating new partnerships and alliances.
– For the global economy, we think a “hard landing” in 2023-2024 is more likely than a recession, but in the US recession risks are notably higher.
– Given widespread market uncertainty, investors may want to assemble a broader toolkit to smooth out volatility and take advantage of opportunities as they arise.
– Our Global CIOs offer their top equity, fixed-income and multi-asset investment ideas
|Vontobel|| – With inflation running rampant and recessionary fears building, markets are still facing tremendous uncertainty.|
– Higher Treasury yields would be useful for bond investors as at some stage they would need to embrace Treasuries, as a risk off asset, to help try to protect portfolios as the economy heads into late cycle.
– Late cycle is certainly where we see us heading by the end of this year, with slowing growth, rising rates, and eventually weaker consumer and corporate balance sheets. So the time to start owning some protection is now upon us, in our opinion.
– Our base case for year end is now therefore that Fed Funds will be at 3.50%, 2 years at or around 3.00% and the 10 year note also around the 3.00% level. That means, in our opinion, buying longer dated Treasuries for portfolio balancing purposes, especially at yields north of 3%, would be a prudent consideration and that the second half of the year should provide bond investors with some much needed stability.
– Our central scenario considers higher rates in the near-term and eventual rate cuts further out; above consensus inflation in the near-term but lower as the recession bites; and well below consensus growth throughout, strongly informing our asset allocation.
– More optimistically, there is a narrow path to monetary policy tightening that is enough to bring inflation under control but not enough to generate recession. But this Fed “walks the tightrope” scenario requires a lot to go right – it is plausible but overly complacent.
– This central scenario is not fully priced by most financial markets. Bond curves incorporate large rate hikes, but don’t price the subsequent monetary policy loosening cycle that would be needed in a recession. The drawdown in equity markets and widening of credit spreads in the higher risk areas of credit so far this year primarily reflects a valuation rerating together with some moderation in earnings growth, rather than the earnings contraction that would occur in a recession.
– This prompts caution in allocation and careful portfolio construction. Portfolios should acknowledge the downside risks to growth, earnings, and therefore, cashflows, but should also have some protection should the Fed indeed “walk the tightrope”. Security selection also remains important in this environment where investors are likely to ascribe increasing value to ‘quality’
|UBS||– Asset Allocation: Patient investors may be able to enjoy an even more attractive entry point for global equities, which may come if cyclical moderation in inflation allows central banks to shift in a more dovish direction allowing global economic activity to inflect higher.|
– Climate: Rising inflation has driven a sharp shift in investor preferences – traditional value appears to be back in fashion. Sustainable investors looking beyond the ‘already green’ may gain exposure to hidden climate solution assets at discount. These are typically emission-intense legacy sectors that must decarbonize. These businesses will likely be recategorized as green and earn higher valuations as they evolve.
– Hedge Funds: Much of the first half of 2022 has been characterized by events that have shaken global risk markets. During these turbulent months, hedge funds generally weathered this period better than equity or bond beta, a pertinent reminder that adding a diversified hedge fund allocation to traditional portfolios may serve as a good diversifier, particularly in difficult market environments.
– Real Estate: Our model showed that real estate offered a 78% inflation protection and up to 80% when further conditions such as real interest rates and variable property risk premium were applied. However, we are now seeing rising risk of stagflation, due to rising interest rates from central banks as they attempt to curb inflation.
|Generali Investments||– Equities remain under pressure at least for the short term. The war is not going to stop soon and sanctions as well as energy supply issues are causing inflation to surprise analysts on the upside.|
– Central Banks’ (CBs) hawkishness and higher 10-year rates continue to cause deteriorating financial conditions for longer, raising firms’ cost of capital and inducing investors to demand a high-risk premium.
– We see PEs to remain under pressure (target is 16X US and 12.5X EMU) due to higher yields and inflation. Furthermore, our Machine Learning models see equity not favoured vs bonds yet. As CBs stay quite hawkish, the risk of a marked economic slowdown increases, and markets have yet to discount a hard landing (-14% is the downside risk, i.e., 3,170 for the S&P 500). The US Tech remains at risk: valuation bubble has not dissolved yet (20%).
– For the short term, we increase the underweight (UW) equity position notwithstanding potential positive total return in 6-12 months (ca. 3%). We are slight overweight (OW) China, US & UK vs. EMU, neutral on Japan and UW SMI. Sector OWs: Oils, Materials, Diversified Fin., Durables, Utilities. UWs: Cap. goods, Food, RE, Media, Pharma, Insurance, Comm.& professional services.