Snapshot

Views at a glance - January 2022


Encouraging signs on Omicron

The Omicron variant has caused coronavirus cases to spike to their highest levels since the start of the pandemic in many countries. Thankfully, widespread vaccinations and the reduced virulence of Omicron mean that hospitalisations and deaths have not followed suit. The next few months are still likely to be difficult: given the scale of infection, there could well be pressure on hospital capacity even with a lower rate of serious cases. However, looking further ahead, Omicron could herald the end of the pandemic as coronavirus becomes more of an endemic disease and less of a burden to the world’s health systems. This possibility helped equity markets rally strongly into year end.

Fed set to follow BoE’s interest rate lead

Central banks had an unusually busy December. The Bank of England raised its Base Rate to 0.25%, from 0.1% previously. We expect it will follow up with another 0.25% rise in February and then pause as inflation starts to moderate from current high levels. US monetary policy appears to be on a similar path, with a lag of several months. In December, the Federal Reserve indicated it would end its asset purchase programme by March and raise interest rates by mid-year. We expect one further increase this year. Equities have largely shrugged off the prospect of higher interest rates, though it may be apparent in the weaker performance of sectors that are particularly sensitive to liquidity conditions - such as early-stage technology. China stands out as the only major central bank that is likely to ease monetary policy this year, as the country contends with a significant slowdown.

Geopolitical disputes back on the agenda

Long-running international tensions subsided somewhat as countries turned inwards to deal with the pandemic. However, as the health threat recedes, several key flashpoints are coming into focus again. Ukraine is currently of greatest concern, with a significant build-up of Russian troops at its border. Developments relating to Taiwan and Iran are also worrying. While full-scale military conflict is not currently the most likely outcome in any of these situations, there are many other scenarios that could threaten global growth – including sanctions, tariffs and disruptions to energy supply. More generally, relations between the US and China remain tense and could flare up again in 2022 – especially with the US facing mid-term elections later in the year.

Portfolio positioning

Within our multi-asset portfolios, we head into 2022 with an overweight position in equities relative to our strategic allocation. Our forecasts for economic and corporate earnings growth continue to suggest maintaining exposure to the asset class. Our portfolios stand to benefit from ongoing economic recovery, though we remain focused on longer-term themes such as energy transition, technology and healthcare. Away from equities, we have a preference for alternative investments over fixed income. We continue to expect bond yields to rise from current low levels as central banks raise policy interest rates and inflation remains higher than pre-pandemic levels.

Outlook

At-A-Glance-EXPORTS-Icon-625x626.png Economics
  • Strong, but slower growth in the year ahead versus 2021
  • Growth supported by elevated consumer spending and increasing capex
  • Economic activity data has peaked but remains elevated particularly in the service sector
  • Inflation could remain elevated in the near term
  • Moderating monetary and fiscal policy
At-A-Glance-VALUATION-Icon-625x626.png Valuations
  • Bonds remain expensive but can provide some defensive ballast
  • Equities are expensive relative to their own history, but need to be supported by earnings growth
  • Alternative assets including absolute return funds look relatively attractive as diversifiers
At-A-Glance-SENTIMENT-Icon-625x626.png Sentiment
  • Investors remain concerned about covid variants, persistently high inflation and threats to global growth
  • Sentiment indicators have moderated from extended levels
  • Volatility has picked up recently in response to Omicron concerns
At-A-Glance-RISKS-icon-625x626.png Risks
  • Risk of ‘stagflation’ i.e. slower growth, higher inflation
  • Risk of Omicron variant and vaccine efficacy concerns
  • Impact of slowing growth in China and potential for further regulatory intervention
  • Elevated asset valuations
  • Growing geopolitical tension (Ukraine, Taiwan, Middle East)

 

Asset Classes

 Asset classes Current positioning Medium term view Current views
Equities At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-50x50.png Near-term sentiment has been impacted by Covid concerns with the spread of the Omicron variant, central banks’ reaction to high inflation figures, and concerns over Chinese growth centring around the growing property sector crisis. This could result in further periods of equity market volatility. Over the medium term the expectation for above-trend growth and robust earnings should support markets. We maintain conviction in long-term secular themes including technology and health care and energy transition.
Bonds At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png Longer-dated government bonds offer defensive characteristics given growth concerns. Valuations however remain expensive. We prefer USD and Chinese government bonds due to relatively higher yields and diversification benefits. We prefer corporate and inflation-linked bonds to conventional government bonds.
Alternatives At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Attractive diversification characteristics compared with equities and bonds. We favour absolute return strategies with the ability to deliver less correlated returns as well as real assets with long-dated visible revenue streams.
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.

Equities

 Asset Current positioning Medium term view Current view
Equities At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-50x50.png Near-term sentiment has been impacted by Covid concerns with the spread of the Omicron variant, central banks’ reaction to high inflation figures, and concerns over Chinese growth centring around the growing property sector crisis. This could result in further periods of equity market volatility. Over the medium term the expectation for above-trend growth and robust earnings should support markets. We maintain conviction in long-term secular themes including technology and health care and energy transition.
UK At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png Pressure on Bank of England to raise rates has increased, but the government have paved the way for increased spending on infrastructure as well as other areas. Valuations remain relatively attractive and we continue to see more opportunities within the domestic space.
Europe At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Tighter restrictions across Europe may impact consumer sentiment and spending which could have near-term growth implications. European earnings are relatively sensitive to a slowdown in China. Monetary policy continues to be accommodative while spending from the NextGeneration EU plan will be supportive.
North America At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png There remains the potential for further fiscal support, despite political wrangling. Economic activity remains robust and corporate capex could be supportive, although we are watchful of valuations which remain elevated.
Japan At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png Restrictions remain relatively stringent which may suppress activity despite high levels of vaccination. Potential for fiscal support package in the new year and high savings rates could support the domestic economy.
Asia/
Emerging markets
At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-50x50.png Normalising Chinese growth and weakening credit impulse may have broader implications for the region. The risk of contagion from the Evergrande Group crisis continues to weigh on sentiment in the near term, although the central bank policy response will be supportive.

 

Bonds

Asset Current positioning Medium term view Current views
Bonds At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png Longer-dated government bonds offer defensive characteristics given growth concerns. Valuations however remain expensive. We prefer USD and Chinese government bonds due to relatively higher yields and diversification benefits. We prefer corporate and inflation-linked bonds to conventional government bonds.
Government bonds At-A-Glance-Status-Icons-NEGATIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEGATIVE-50x50.png Long-dated government bonds provide some portfolio insurance characteristics, despite the risk of rising inflation. Chinese government bonds offer relatively more attractive real yields with lower volatility.
Investment grade At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png We are mindful of company leverage, spreads below pre-Covid levels and absolute yields at close to all time lows. Opportunities within asset backed securities which offer a relatively attractive yield.
High-yield At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png Spreads remain close to pre-Covid levels. Default rates remain supported by low cost of debt and expected positive economic growth in the short term.
Inflation-linked At-A-Glance-Status-Icons-POSITIVE-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png We prefer US TIPS to conventional treasuries and UK linkers given the reduced cost of currency hedging. Inflation expectations have the potential to move higher in response to supply chain concerns and energy prices although we are conscious of the potential impact of rising real yields.
Emerging markets At-A-Glance-Status-Icons-NEUTRAL-50x50.png At-A-Glance-Status-Icons-NEUTRAL-50x50.png Emerging market bonds offer selective value across both US dollar and local currency debt. Idiosyncratic country risk remains diverse and a significant driver of returns.

 

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 Attractive diversification characteristics compared with equities and bonds. We favour absolute return strategies with the ability to deliver less correlated returns as well as real assets with long-dated visible revenue streams.
Absolute Return At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png Selected opportunities in market-neutral strategies given increased stock dispersion and diversification characteristics.
Liquid private real assets At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-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 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, whilst broader commodities can hedge against sharp rises in inflation.
Short equity vol At-A-Glance-Status-Icons-POSITIVE-NEUTRAL-50x50.png At-A-Glance-Status-Icons-POSITIVE-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.

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.

This article is issued by Cazenove Capital which is part of the Schroders Group and a trading name of Schroder & Co. Limited, 1 London Wall Place, London EC2Y 5AU. Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. 

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.