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Investment expertise

Monthly Investment Outlook

Monthly Investment Outlook

We publish a Monthly Investment Outlook that highlights our convictions on equities and bonds, as well as recent asset allocation changes.


Summary

  • MONTHLY INVESTMENT OUTLOOK - Recession risk - the point of recognition approaches
  • GLOBAL TACTICAL ASSET ALLOCATION - Favour quality and asymmetry
  • UBP ECONOMIC OUTLOOK - Accumulated risks weigh on Europe
  • UBP ECONOMIC OUTLOOK - EU to face major shock in case of a gas shut-off
  • GLOBAL BONDS - Preference for hedge funds and investment grade credit
  • GLOBAL EQUITIES - Earnings estimates still significantly too high
  • RECENT CHANGES - Adding global macro and CTA strategy into hedge fund
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  • Just as markets had to reprice a new interest rate regime in early-2022 amidst fading hopes for a transitory inflationary backdrop, they are now similarly beginning to recognise that the prospects of an economic soft landing are fading, and the risks of recession are on the rise.
  • Indeed, market implied probabilities of recession – which rose going into the 2000, 2008-09, and 2020 recessions – are once again moving up, but still falling short of the economic shocks, but not outright recessions seen in 1998 and 2016.
  • Despite rising recessionary risks, we do not expect either the US Federal Reserve or the European Central Bank to pause their respective rate hiking cycles, until at least September as both await signs of an easing in inflationary pressures. As noted last month, such a focus on a historically lagging indicator, may risk a deeper downturn in the labour market and/or manufacturing sector ahead.
  • Markets, however, are anticipating that the Federal Reserve will pause its rate hiking cycle as futures markets forecast a 3.3% Fed Funds rate by year end (vs. 2.5% currently) to try to avert this risk.
  • Even if correct, history suggests that Treasuries and credit offer the more attractive risk-return profiles ahead of and even after rate hikes end. Since 1981, US Treasuries and USD credit have delivered flat/positive returns in the six months prior to an end to Fed rate hikes. In the six months following an end to rate hikes, Treasuries and credit have delivered, averaging 7.9-8.4%.
  • Equities have delivered a more mixed picture than bonds in the six months prior to an end to Fed rate hikes. Since 1989, equity investors have earned 5.8% average returns as the final Fed rate hikes were implemented. However, investors had to weather average drawdowns of -5% as well as a near 13% decline in December 2018.
  • Moreover, during the high inflation periods of the 1970s and early-1980s, investors saw an average of -5% returns as Fed rate hikes came to an end with maximum drawdowns of -7.6%.
  • As a result, in addition to our recent addition to USD duration at Treasury yields above 3% and a focus on high quality credit, we have pivoted our hedge fund allocation from long-short equities and credit arbitrage towards global macro strategies and CTAs. This shift will add an additional cushion to portfolios amidst the credit and equity volatility that typically comes at this stage of the economic cycle.
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Investment Outlook 2022

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