Snapshot

Views at a glance – September 2022


Summer respite coming to an end

Global stock markets rebounded over the summer, recovering some of the steep losses experienced in the first half of the year. The optimism was fuelled by continued strength in corporate earnings and some signs that inflation may have peaked, at least in the US. However, volatility returned as August drew to a close and both stock and bond markets remain under pressure. This may better reflect the unwelcome combination of high inflation and low growth that overshadows the world economy. Schroders’ economists have once again cut their forecast for global growth and now expect it to slow to just 1.5% in 2023. Apart from during the height of the Covid-19 pandemic, this would be the worst year for global activity since 2009.

Inflation not yet slain

The latest sell-off was triggered by speeches at the Jackson Hole Economic Symposium and in particular Jerome Powell’s warning that bringing down inflation would involve “pain for households and businesses.” Along with tough messages from other central bankers, this has dampened hopes that the pace of interest rate increases may be about to slow. This would be premature, especially in the US where inflation has become widespread throughout the economy – and is no longer simply a function of higher energy and food prices. Central bankers are very wary of the mistakes of the 1970s, when Fed Chair Arthur Burns was too quick to ease monetary policy - prompting further inflationary spikes.

No easy choices for new UK prime minister

Liz Truss has been chosen as the next leader of the Conservative party – and the UK’s new prime minister. She steps into a fast-unfolding crisis, with energy bills set to soar and millions facing fuel poverty. Government support will be needed, but the form and extent of the response may not be known until an emergency budget is published, likely later this month. Sterling and the UK bond markets have both been weak as the country faces the threat of even higher inflation and further interest rate rises. 

Portfolio positioning

Central banks remain more focused on tackling inflation than supporting growth and the risk of recession remains elevated. We could also see corporate earnings start to decline over the remainder of the year. In this environment, we are happy to remain underweight equities, with a clear preference for higher-quality companies. Government bond valuations now look more attractive and we are likely to gradually increase our exposure over the coming months, further increasing the defensiveness of portfolios. We think that real assets such as property, renewable energy and infrastructure have an important role to play as diversifiers. We also expect that safe-haven assets like gold and the US dollar should 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 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   Concerns over the economic impacts of the monetary policy response to continued high levels of inflation, the rising risk of recession and deteriorating corporate earnings could all keep equity market volatility elevated. We continue to prefer higher-quality 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, although face near term headwinds from rising interest rates. 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   Concerns over the economic impacts of the monetary policy response to continued high levels of inflation, the rising risk of recession and deteriorating corporate earnings could all keep equity market volatility elevated. We continue to prefer higher-quality 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   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 for greater self-sufficiency in both energy and agriculture and is therefore more insulated from geopolitical unrest. Further interest rate rises are likely whilst inflation remains elevated. 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 do not increase.
Asia/
Emerging markets
At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png   In the near term investor sentiment continues to be tested by uncertainty around China’s property sector and the potential for further restrictions under China’s “Zero Covid” policy. However, monetary policy is becoming more supportive, there is the potential for greater fiscal spend to support growth and valuations remain attractive relative to 15 year averages.

 

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, although face near term headwinds from rising interest rates. 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. They also benefit from floating interest rates, which are more appealing in a rising interest rate environment.
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. Valuations are supportive and there are select opportunities 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    We see select opportunities in equity long/short strategies given increased stock dispersion and diversification characteristics. However, 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 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.

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