IN FOCUS6-8 min read

The risk of a correction is rising

Inflation has moderated in the second half of the year – but it may be more of a threat in 2022.



Caspar Rock
Chief Investment Officer

It has been almost a year since news of a successful vaccine against Covid-19. In that time, the MSCI World Index has risen some 20% while any dips have been shallow and short-lived. 

Investors' enthusiasm won’t last forever. However, for now, we are sticking with our overweight allocation to equities. The key reason is that both GDP and corporate earnings should continue to grow, providing fundamental support for the asset class. After a dramatic rebound in earnings this year, companies are on track for a year of solid, if unexciting, earnings growth in 2022. We also continue to see pockets of value within stock markets, as well as compelling growth opportunities.

A foot in both the growth and value camps

The strong recovery from the pandemic paved the way for a dramatic comeback for more cyclical sectors, after years in the doldrums. However, over recent months it is growth sectors that have once again taken the lead. This has rewarded our decision to maintain our overweight allocation to technology and healthcare, which we think continue to offer a multi-year opportunity. We also maintain our carefully selected exposure to more cyclical sectors.

These should start to perform more strongly as fears over the delta variant subside. In case this takes time to materialise, we have tilted our exposure towards higher quality companies with healthy balance sheets.

Rising risks of pullbacks

The early months of an economic recovery tend to be the best for equity markets: the transition to a period of lower growth can be tricky, as investors question the strength and durability of the expansion. Equities can continue to deliver attractive returns, but the path tends to be bumpier. We may well be entering such a phase now and we are therefore maintaining our exposure to defensive and diversifying assets. These can help protect portfolios during equity market drawdowns and reduce overall volatility.

Lower returns as economy transitions to next stage
of recovery

S&P500, average cumulative return (%) in different phases of market cycle


Source: Goldman Sachs. Returns from S&P500 since 1973. The “hope” phase of the market cycle typically starts in recession, as investors anticipate economic recovery.

Inflation makes diversification trickier

The prospect of inflation closer to 3% rather than 2% could create a more challenging environment for conventional government bonds – traditionally the key defensive asset within portfolios. We have therefore reduced our position in conventional bonds in favour of inflation-linked bonds, which have defensive characteristics while also offering inflation protection. We have raised our exposure to high-quality credit as a way to enhance returns from our defensive assets without significantly increasing risk. Lastly, we have slightly  increased our allocation to hedge funds. We are focused on funds that can generate attractive returns with low correlation to equity and bond markets. 

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.



Caspar Rock
Chief Investment Officer


In Focus

Cazenove Capital is a trading name of Schroders (C.I.) Ltd which is licensed under the Banking Supervision (Bailiwick of Guernsey) Law 2020 and the Protection of Investors (Bailiwick of Guernsey) Law 2020, as amended in the conduct of banking and investment business. Registered address at Regency Court, Glategny Esplanade, St. Peter Port, Guernsey GY1 3UF, (No.24546) . Schroders (C.I.) Limited, Jersey Branch is regulated by the Jersey Financial Services Commission in the conduct of investment business. Registered address at 40 Esplanade, St. Helier, Jersey JE2 3QB, (No.31076).

The value of your investments and the income received from them can fall as well as rise. You may not get back the amount you invested.