Snapshot

Views at a glance – August 2022


Some stability returns to markets

After steep falls earlier in the year, stock and bond markets have both enjoyed a modest rebound over the summer. While reported inflation remains high, prices of many commodities have fallen, suggesting that inflationary pressures could start to ease over the coming months – especially for manufactured goods. Investors may be hoping this will allow the Federal Reserve to slow the pace of rate rises and achieve a “soft landing”. However, this could prove optimistic. The Fed may have to keep raising rates to ensure that inflation also slows in the larger services sector. And there are already signs that the US economy is slowing significantly, with early estimates suggesting that it experienced two consecutive quarters of contraction, the most common definition of a recession.

ECB raises interest rates for the first time in eleven years

The ECB announced a larger-than-expected rate hike last month, taking its deposit rate to 0% and ending a policy of negative interest rates. The ECB arguably has an even more difficult task than other major central banks in its efforts to bring inflation under control. European gas prices remain at record highs, keeping inflation high and depressing growth. Italy’s high debt and unstable politics are also becoming a concern for investors, reviving memories of the eurozone debt crisis. The ECB has introduced a new tool called the Transmission Protection Instrument that is intended to prevent bond spreads from widening and avoid a repeat of the events of a decade ago.

A change in direction for the UK

Italy is not the only European country grappling with political uncertainty, as the UK Conservative party picks a new leader – and a new Prime Minister. Sterling has been weak, but for now this appears to be more a reflection of the country’s high inflation and low growth than the political situation. Even so, the outcome of the leadership contest could result in a meaningful shift in economic policy. Rishi Sunak has spoken against unfunded tax cuts, while his rival Liz Truss has pledged both tax cuts and higher spending. She has also said she would “look again” at the Bank of England’s mandate, suggesting it had not been “tough enough” on inflation. The Monetary Policy Committee has since followed the ECB and raised interest rates by 50 basis points.

Portfolio positioning

The risk of a global recession remains elevated and we therefore continue to focus on the defensiveness of our portfolios. We have been reducing our overall equity exposure and have cut our allocation to smaller and more cyclical companies. Over the course of the year, we have benefited from our underweight position in fixed income and overweight allocation to alternatives. However, government bond yields have risen and now look relatively more attractive, providing the opportunity to gradually add back to these positions. This would further increase the defensiveness of portfolios. We also believe that real assets like property, renewable energy and infrastructure can benefit multi-asset portfolios in periods of high inflation. Safe havens such as gold and the US dollar should also provide some protection in more challenging environments.

Outlook

At-A-Glance-EXPORTS-Icon-625x626.png Economics
  • An uncertain outlook with slowing economic growth and rising risk of recession.
  • Moderating commodity prices and fewer supply chain disruptions could ease US inflationary concerns.
  • Headline inflation in the UK and Europe could move higher given greater reliance on commodities from Russia and Ukraine.
  • Weaker consumer spending could have broader economic implications.
  • Interest rates are likely to continue to rise in the near term.
At-A-Glance-VALUATION-Icon-625x626.png Valuations
  • Global equities have meaningfully de-rated this year and now look more attractively valued.
  • Government bond valuations look relatively more attractive given the sizeable moves we have seen this year, although remain vulnerable to further interest rate rise.
  • Alternative assets including absolute return funds and commodities look attractive as diversifiers.
At-A-Glance-SENTIMENT-Icon-625x626.png Sentiment
  • The potential for a policy pivot to combat slowing economic growth has boosted investor sentiment in the short term.
  • The risk of recession and the inflationary impacts of ongoing geopolitical tensions are likely to continue to test investor sentiment.
  • Consumer confidence remains close to all-time lows and business optimism surveys are weak.
At-A-Glance-RISKS-icon-625x626.png Risks
  • A consumer-led recession.
  • Persistently high inflation and higher-than-expected interest rates.
  • Threats to global economic growth from rolling lockdowns in China.
  • Further escalation of the Russia Ukraine conflict.

 

Asset Classes

 Asset classes Current positioning Medium term view Current views
Equities At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png   At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png   Near-term sentiment has been boosted by the potential for a shift in policy to combat slowing economic growth. This has benefited interest rate sensitive “growth” sectors which suffered heavy losses during the first half of the year. However, the risk of recession, continued high inflation and deteriorating corporate earnings could all keep volatility elevated. We continue to prefer higher-quality, large cap companies which can better navigate a more challenging environment. We maintain conviction in long-term secular themes including technology and energy transition.
Bonds At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png   Nominal government bonds have defensive characteristics in a more challenging macro-economic environment. We prefer US Treasuries, due to their relatively higher yields. We are starting to see opportunities in short-dated gilts, which offer a higher yield than cash. Within credit. we like short-dated, high-quality asset backed securities which offer a relatively attractive yield. They also benefit from floating interest rates, which are more appealing in a rising interest rate environment.
Alternatives At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Continue to offer attractive diversification characteristics in a volatile environment. We favour absolute return strategies with the ability to deliver less correlated returns as well as real assets with long-dated visible revenue streams and commodities.
Cash At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png Cash has defensive qualities in potentially volatile markets, while rising interest rates may offer some potential for returns.



Equities

 Asset Current positioning Medium term view Current view
Equities At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png   At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png   Near-term sentiment has been boosted by the potential for a shift in policy to combat slowing economic growth. This has benefited interest rate sensitive “growth” sectors which suffered heavy losses during the first half of the year. However, the risk of recession, continued high inflation and deteriorating corporate earnings could all keep volatility elevated. We continue to prefer higher-quality, large cap companies which can better navigate a more challenging environment. We maintain conviction in long-term secular themes including technology and energy transition.
UK At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png  At-A-Glance-Status-Icons-DOWN-50x50.png Valuations remain relatively attractive. While large cap performance has benefited from greater exposure to cyclical sectors, global growth concerns could weigh over the medium term. The Bank of England remains under pressure to continue normalising policy given elevated inflation, despite domestic growth concerns.
Europe At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png   At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png   Given Europe’s greater economic exposure to Russia (particularly through energy) the inflation and growth outlook for the region looks more challenging and could pressure consumer and investor sentiment. The ECB is under pressure to normalise monetary policy.
North America At-A-Glance-Status-Icons-NEUTRAL-50x50.png   At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png   The US economy has the potential to be greater self-sufficiency in both energy and agriculture and is therefore more insulated from geopolitical unrest. Consumer sentiment remains close to all-time lows and business optimism is weak. However, valuations have moderated and earnings remain relatively robust.
Japan At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png Lower risk of inflation, more fiscal support combined with accommodative monetary policy could lead to improved domestic economic growth driven by consumption. Economic exposure to China could be beneficial if Covid restrictions continue to ease.
Asia/
Emerging markets
At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png  At-A-Glance-Status-Icons-UP-50x50.png In the near term, fewer Covid restrictions have benefited economic activity. Chinese lending activity look to be improving with political support for higher spending to boost growth into 2023. Valuations are now at a significant discount to 15-year averages. China’s “Zero Covid” policy and potential for rolling lockdowns remain a risk and there is continued uncertainty around the property sector.

 

Bonds

Asset Current positioning Medium term view Current views
Bonds At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png  
Nominal government bonds have defensive characteristics in a more challenging macro-economic environment. We prefer US Treasuries, due to their relatively higher yields. We are starting to see opportunities in short-dated gilts, which offer a higher yield than cash. Within credit. we like short-dated, high-quality asset backed securities which offer a relatively attractive yield. They also benefit from floating interest rates, which are more appealing in a rising interest rate environment.
Government bonds At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png   Nominal government bonds have defensive characteristics in a more challenging macro-economic environment. Valuations look relatively more attractive given the sizeable moves we have seen this year, although remain vulnerable to further interest rate rises. We prefer US Treasuries due to relatively higher yields.
Investment grade At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png We prefer shorter-duration and higher-quality credit in the near term. given the potential for further spread widening. Opportunities remain within asset backed securities which offer a relatively attractive yield and floating interest rates.
High-yield At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png Recent spread widening offers some valuation support while higher yields and shorter duration characteristics look attractive. Default rates remain low although face headwinds from a rising cost of debt and a more challenging economic backdrop.
Inflation-linked At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png   The potential for more persistent inflationary pressures could keep inflation expectations elevated relative to recent history. We see opportunities in UK inflation-linked gilts given a more challenging inflation outlook for the UK relative to the other areas of the world.
Emerging markets At-A-Glance-Status-Icons-NEGATIVE-50x50.png   At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png   Certain emerging markets could see near term balance sheet deterioration as a result of a more uncertain global economic backdrop and continued Covid headwinds. There is selective value across both US dollar and local currency debt.

 

Alternatives and cash

Asset Current positioning Medium term view Current views
Alternatives At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Continue to offer attractive diversification characteristics in a volatile environment. We favour absolute return strategies with the ability to deliver less correlated returns as well as real assets with long-dated visible revenue streams and commodities.
Absolute Return At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png   At-A-Glance-Status-Icons-DOWN-50x50.png We see select opportunities in equity long/short strategies given increased stock dispersion and diversification characteristics. However, falling inflation could see the correlation between bonds and equities fall. Government bonds are now looking more attractively valued and may provide a better source of portfolio diversification over the medium term.
Liquid private real assets At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Long-dated revenue streams and income characteristics remain attractive in select parts of the market. Within this space we see good opportunities in digital infrastructure, specialist property and and exposure to private companies.
Commodities At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Gold is attractive as a diversifier and should provide portfolio insurance in the event of a meaningful equity market correction or economic growth shock. Broader commodities can hedge against further rises in inflation.

Equity-linked income strategies At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png Offer attractive returns especially in times of heightened volatility, but we acknowledge the shorter-term correlation with equities.

Cash At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png Cash has defensive qualities in potentially volatile markets, while rising interest rates may offer some potential for returns.
 



Key

At-A-Glance-Status-Icons-POSITIVE-50x50.png Positive
At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Positive/neutral
At-A-Glance-Status-Icons-NEUTRAL-50x50.png Neutral
At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png Negative/neutral
At-A-Glance-Status-Icons-NEGATIVE-50x50.png Negative
At-A-Glance-Status-Icons-UP-50x50.png Up from last month
At-A-Glance-Status-Icons-DOWN-50x50.png Down from last month

 

Terms

Spread: the difference in yield between a non-government and government fixed income security.

Duration: approximate percentage change in the price of a bond for a 1% change in yield.

Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.

Contact Cazenove Capital

To discuss your wealth management requirements, or to find out more about Cazenove Capital and our services, please contact: