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MEDICAL Covid-19 restrictions (ongoing)

MACRO Inflation and bond yields (ongoing)

MACRO Restocking inventories (not yet)

MEDICAL Covid-19 vaccine (ongoing)

FISCAL US infrastructure (ongoing)

MONETARY Fed tapering (ongoing)

FISCAL EU infrastructure (ongoing)

MACRO Bottlenecks and energy spikes (ongoing)

GEOPOLITICS US–China tensions (ongoing)

Thank you for reading our monthly update. Please contact us if you have any questions, remarks or suggestions regarding this update.

WE TAKE TIME TO LISTEN

Counterpoint January 2022

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 December 2021 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.


Copyright © Quintet Private Bank (Europe) S.A. 2021.
All rights reserved. Privacy Statement

Invest in a richer life,
however you define it.

The asset allocation vector

Click an asset class to show the sub-asset classes

0.0
-2.0
0.0
2.0
FX
ALTERNATIVES
FIXED INCOME
EQUITIES
N

Omicron has unsettled markets but is unlikely to stop the general uptrend

Shaken but not stirred

Quintet portfolio

Economic and company earnings growth are past their peaks, but we believe the business cycle has much further to run. As it matures, returns from risky assets will probably normalise from the stellar levels they achieved in 2021. Yet there is still plenty of room for equities and corporate bonds to outperform low-yielding government bonds.

We’re maintaining our moderate ‘pro-risk’ tactical allocations. US equities remain the region with the best momentum and most attractive mix of industry sectors. Emerging market sovereign bonds provide decent carry, while Asian high yield debt should benefit from tighter spreads.

The Quintet Investment Cycle Indicator shows that corporate profit margins remain strong and the labour market is now in expansion mode across all measures

The economic recovery is heading towards a mid-cycle phase, which usually provides a positive backdrop for investment returns

Getting more mature

COUNTERPOINT JANUARY 2022

Scroll down

Welcome

Past the peak

New virus strains are an inconvenience but unlikely to set back the economic recovery for very long

The pandemic has disrupted our daily rhythms and changed our sense of time. Just as we were beginning to settle into some new patterns, the Omicron variant brings the renewed risk of restrictions on socialising and international travel. Christmas parties have been downgraded or cancelled, and investors have started to worry about the short-term outlook for the economy and financial markets.

We believe this new strain of the virus is unlikely to throw the recovery off course for very long. Many of the key macroeconomic drivers of the past couple of years should move past the peak over the next 12 months – from economic growth and inflation to policy stimulus and the impact of Covid waves. We describe this process as a maturing cycle and you can read more about our outlook for the year ahead in our Counterpoint 2022 publication.

Bill Street
Group Chief Investment Officer

Source: Quintet, US Census Bureau

Inflation should begin to subside as companies rebuild their inventories

Stocking fillers

Top chart

Inflation is high for various reasons and the main cause seems to be strong demand pressing against constrained supply. To determine when it’s likely to fall, we’re monitoring inventories and sales. The ratio spiked when sales collapsed during the initial lockdown and then fell to a decade low. As factories ramp up production and supply bottlenecks ease, we expect the rebuilding of inventories to support economic activity in 2022 and put downward pressure on inflation.

Renewed restrictions in Germany, the Netherlands and Austria are putting the brakes on growth in Europe but the impact is not substantial so far. Omicron poses an additional risk to the recovery not only in Europe but also in the US, where Delta infections have surged recently too. The positive news is that although new virus strains are more easily transmitted, they are less deadly. Widespread vaccination rates and economic adaptability are also helping.

We believe the economic cycle will continue to head towards a mid-cycle phase. Although slightly reduced, the pace of growth should remain relatively solid throughout 2022 as global patterns of trade recover from the disruption caused by the fall in demand during the lockdowns. Inflation has been persistently high for the past year but we continue to believe it’s not a self-sustaining spiral and so it will begin to subside next year.

MEDICAL
Covid-19 restrictions (ongoing)

MACRO
Inflation and bond yields (ongoing)

MACRO
Restocking inventories (not yet)

Policy conundrum
High inflation and Omicron are combining to make things difficult for central banks. The US Federal Reserve has said it plans to quicken the “tapering” of its stimulus measures and may raise interest rates faster than expected. The Bank of England also looks likely to continue to tighten monetary policy over the next few months. Meanwhile, the ECB has decided to discontinue its pandemic purchases by the end of March, while increasing its ‘normal’ bond-buying programme as a partial offset.

After 12 months of twists and turns, the year ahead looks set to be another eventful one for markets. Inflation is likely to continue to grab the headlines, and geopolitical tensions could also cause periods of volatility. Some structural trends are likely to reassert themselves along with new ones that got a boost from the pandemic – from the ‘build back better’ overlap between infrastructure projects and sustainability to ongoing innovation across industry sectors.

This document has been prepared by Quintet Private Bank (Europe) S.A. The statements and views expressed in this document based upon information from sources believed to be reliable – are those of Quintet Private Bank (Europe) S.A. as of 20 December 2021 and are subject to change. This information is defined as non-independent research because it has not been prepared in accordance with the legal requirements designed to promote the independence of investment research, including any prohibition on dealing ahead of the dissemination of this information. This document is of a general nature and does not constitute legal, accounting, tax or investment advice. This document does not provide any individual investment advice and an investment decision must not be based merely on the information and data contained in the document. All investors should keep in mind that past performance is no indication of future performance, and that the value of investments may go up or down. Changes in exchange rates may also cause the value of underlying investments to go up or down.


Copyright © Quintet Private Bank (Europe) S.A. 2021.
All rights reserved. Privacy Statement

Invest in a richer life,
however you define it.

Economic and company earnings growth are past their peaks, but we believe the business cycle has much further to run. As it matures, returns from risky assets will probably normalise from the stellar levels they achieved in 2021. Yet there is still plenty of room for equities and corporate bonds to outperform low-yielding government bonds.

We’re maintaining our moderate ‘pro-risk’ tactical allocations. US equities remain the region with the best momentum and most attractive mix of industry sectors. Emerging market sovereign bonds provide decent carry, while Asian high yield debt should benefit from tighter spreads.

The Quintet Investment Cycle Indicator shows that corporate profit margins remain strong and the labour market is now in expansion mode across all measures

Renewed restrictions in Germany, the Netherlands and Austria are putting the brakes on growth in Europe but the impact is not substantial so far. Omicron poses an additional risk to the recovery not only in Europe but also in the US, where Delta infections have surged recently too. The positive news is that although new virus strains are more easily transmitted, they are less deadly. Widespread vaccination rates and economic adaptability are also helping.

We believe the economic cycle will continue to head towards a mid-cycle phase. Although slightly reduced, the pace of growth should remain relatively solid throughout 2022 as global patterns of trade recover from the disruption caused by the fall in demand during the lockdowns. Inflation has been persistently high for the past year but we continue to believe it’s not a self-sustaining spiral and so it will begin to subside next year.

Inflation is high for various reasons and the main cause seems to be strong demand pressing against constrained supply. To determine when it’s likely to fall, we’re monitoring inventories and sales. The ratio spiked when sales collapsed during the initial lockdown and then fell to a decade low. As factories ramp up production and supply bottlenecks ease, we expect the rebuilding of inventories to support economic activity in 2022 and put downward pressure on inflation.

The pandemic has disrupted our daily rhythms and changed our sense of time. Just as we were beginning to settle into some new patterns, the Omicron variant brings the renewed risk of restrictions on socialising and international travel. Christmas parties have been downgraded or cancelled, and investors have started to worry about the short-term outlook for the economy and financial markets.

We believe this new strain of the virus is unlikely to throw the recovery off course for very long. Many of the key macroeconomic drivers of the past couple of years should move past the peak over the next 12 months – from economic growth and inflation to policy stimulus and the impact of Covid waves. We describe this process as a maturing cycle and you can read more about our outlook for the year ahead in our Counterpoint 2022 publication.

The economic recovery is heading towards a mid-cycle phase, which usually provides a positive backdrop for investment returns

Getting more mature

COUNTERPOINT JANUARY 2022

Outlook is less certain than last month

Outlook is more certain than last month

While the Omicron variant is a new downside risk, Covid-19 vaccination programmes are ongoing and new ones are being developed, inflation remains high and bond yields are now beginning to rise as central banks are on the move

WHAT TO LOOK
OUT FOR

Monitor

MACRO
Bottlenecks and
energy spikes (ongoing)

GEOPOLITICS
US–China tensions (ongoing)

MEDICAL
Covid-19 vaccine (ongoing)

MONETARY
Fed tapering (ongoing)

FISCAL US
infrastructure (ongoing)

FISCAL EU
infrastructure (ongoing)

MACRO 
Restocking inventories (not yet)

Emerging market sovereign debt / US investment grade bonds
Emerging market sovereign debt offers additional yield over US investment grade bonds. While spreads look by and large fair, the carry is attractive. Gradually rising US yields will ultimately weigh more on USD IG bonds given their longer duration and tighter spreads.

US Treasuries / Eurozone government bonds
We have higher conviction in US Treasuries as a diversifier than in European government bonds thanks to their higher yield to maturity and better credit quality.

US Investment grade bonds  / Eurozone government bonds
The rise in USD yields makes currency-hedged USD bonds better value than European government bonds for EUR-based investors.

US equities / US investment grade bonds
We believe US stocks will outperform low-yielding US investment grade bonds at this still relatively early stage of the business cycle. Pent-up demand is high and earnings momentum remains strong among US corporates.

Asian high yield bonds / US investment grade bonds
Asian high yield bonds offer significant additional yield over US investment grade bonds, and default risks are well compensated for. Despite near-tern risks, the 12-month return outlook is appealing.

When we increase the allocation to one asset class in portfolios, we have to decrease the allocation to another. That’s why our tactical asset allocation (TAA) decisions come in pairs, where we underweight and overweight relative to our strategic asset allocation (SAA) weightings. The specific numerical weights from the chart relate to a EUR balanced portfolio and can be adjusted for different profiles.

More on our views

The asset allocation vector

Click an asset class to show the sub-asset classes

Thank you for reading our monthly update. Please contact us if you have any questions, remarks or suggestions regarding this update.

WE TAKE TIME TO LISTEN

Counterpoint January 2022

Omicron has unsettled markets but is unlikely to stop the general uptrend

Shaken but not stirred

Quintet portfolio

The economic recovery is maturing but reasonable levels of growth should support investment returns over 2022

Into the middle of the cycle

Investment focus

Swipe to see the full graph

Source: Quintet, US Census Bureau

Inflation should begin to subside as companies rebuild their inventories

Stocking fillers

Top chart

Bill Street
Group Chief Investment Officer

New virus strains are an inconvenience but unlikely to set back the economic recovery for very long

Past the peak

Welcome

Seeing the world differently

Quintet’s Chief Investment Office share their views on the economy, markets and investing in our monthly Counterpoint publication.
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