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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 - Rising risk of recession
  • GLOBAL TACTICAL ASSET ALLOCATION - Prioritising risk management
  • UBP ECONOMIC OUTLOOK - Developed countries to face a technical recession
  • UBP ECONOMIC OUTLOOK - The Fed to push the US economy to the verge of a recession
  • GLOBAL BONDS - Preference for hedge funds and investment grade credit
  • GLOBAL EQUITIES - Earnings estimates will need to adjust lower
  • RECENT CHANGES - Adding additional protection and returning to chinese equities
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  • May’s reprieve proved short-lived as recession joined inflation fears pushing equity/bond prices lower in June.
  • Concerns have risen as the increasingly hawkish Fed rhetoric at its June meeting suggests a willingness to trade rising unemployment for a softening in inflation ahead of raising the prospect of outright recession in both Europe and the US.
  • Similarly, the ECB faces rising inflation just as economic data in the single currency area are reflecting the initial slowing following Russia’s February invasion of Ukraine.
  • In particular, the impact of shortages of natural gas and diesel fuel are becoming more acute in Europe. With a large liquified natural gas (LNG) terminal offline in the US combined with Russia’s natural gas giant Gazprom’s decision to reduce gas deliveries to Germany and Italy, the risk of a further inflation rise beyond the 8% reported in May looms on the horizon.
  • Markets appear increasingly confident that the European Central Bank will announce strong measures to avoid rising fragmentation risk within the euro area after some concern following the June ECB meeting. Despite this, euro high yield credit markets appear to continue to underprice the prospect of a recession on the continent, despite the rising risk that one is realised looking ahead.
  • As a result, we continue to focus on our fixed income alternative strategies to mitigate both the prospect of German bund yields resuming their move higher towards 2% and credit spreads widening further to better price the prospect of a slowing domestic economy.
  • As happened in the US, European equity markets have seen PEs fail to meaningfully price a slowdown in continental economies. However, despite the fact that corporate ROE momentum has already rolled over in the Euro area, consensus expectations still fall short of the industrial slowdown suggested by key leading indicators.
  • As a result, with China beginning its slow climb out of recession, we have rotated equity exposure from slowing developed market economies to at least a stabilising China domestic economy looking ahead. Similarly, we have increased Swiss franc exposure in Swiss portfolios to reflect a proactive, hawkish Swiss National Bank and a more cautious outlook on the continent.
  • Overall, however, equity and bond investors should remain vigilant about the prospect of softening earnings expectations moving into 2H2022. We have incorporated structured product and options strategies to cushion portfolios against a repricing of these risks to growth.
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