Although the pace of economic growth is slowing, we don’t think there is any need to worry about a contraction soon
Later in the cycle, but not so late
COUNTERPOINT JUNE 2022
Monitor
Portfolio
Investment focus
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Welcome
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Welcome
When the going gets tough
It’s important to remain focused on the long term and avoid over-reacting to news by adjusting portfolios in a measured way to the evolving environment
Investing isn’t easy right now with so much happening around the world. While we expect it to peak later this year or early next year depending on the region, inflation remains quite high right now and central banks are raising interest rates to try to bring it back down – without stunting the pace of economic growth. Many investors have been unsettled by the uncertainty and conditions in financial markets remain rather volatile across the board. In particular, the technology stocks that performed so well during the pandemic lockdowns have suffered.
Yet history shows that patience and commitment rewards investors. That’s why we’re staying focused on the long-term themes we think are likely to disrupt companies, sectors and the wider economy – such as the transition to renewable and reliable energy sources, cybersecurity, robotics and automation. At the same time, we stand ready to adjust our shorter-term strategies if warranted by changing macro or micro drivers. You’ll be able to read more about these investment opportunities when we publish our mid-year outlook over the next few weeks.
Bill Street
Group Chief Investment Officer
Growth stocks are being impacted by higher interest rates, but the long-term fundamental outlook remains positive
When bond yields rise
Top chart
Covid-19, war in Ukraine and China’s lockdown are pushing up inflation. At different paces, central banks have embarked on a tightening path. Bond yields have risen and growth stocks are underperforming value stocks. As the expected cash flows of growth stocks tend to extend further in the future, changes in bond yields (higher) impact their present value (lower). We believe rates are likely to peak at a lower level than market expectations in this cycle. Along with our positive long-term outlook on innovation and technology, this could bring new tailwinds to growth stocks.
Source: In-house research, Refinitiv
Note: Past performance is not a reliable indicator of future performance.
Read more
The business cycle is still expanding but is now in a more mature phase, with the pace of economic growth and business profits having already peaked. Expansion phases (where there is a good level of activity and positive momentum) are alternating with late-cycle phases (a good level of activity but negative momentum). These conditions are typical of previous cycles and are usually followed by a more marked late cycle.
We believe a US recession is unlikely over the next 12 months. If one does come unexpectedly or further down the road, it’s likely to be mild because there are few signs of the imbalances that are usually associated with deep contractions. The probability of recession is higher in the euro area given the conflict in Ukraine, while the UK is somewhere in between. China’s economy should rebound once the lockdowns ease and stimulus measures start working.
The US economy contracted slightly in the first quarter, mostly because of strong imports and an inventory drawdown – a sign of solid spending. It should rebound in the second quarter
The asset allocation vector
Click an asset class to show the sub-asset classes
The outlook for returns from risky asset classes remains positive, even though conditions in markets remain volatile
Holding steady
Quintet portfolio
More on our views
We are not making any asset allocation changes this month to our overall risk-on stance. Although the market environment is evolving, we continue to believe equities will outperform fixed income and that emerging market equities have the potential to deliver the strongest returns.
We also like US equities, which offer exposure to a high-quality companies with robust earnings, and are less vulnerable to geopolitical risks. Emerging market equities are attractively valued and should be supported by policy action.
Within fixed income we see most value in Asia high-yield bonds, supported by Chinese policy easing. Our analysis suggests emerging market sovereign bonds offer attractive valuation and carry.
MACRO Inflation and bond yields (ongoing)
MONETARY Central banks (ongoing)
MEDICAL Covid-19 vaccine (ongoing)
FISCAL US and EU stimulus (ongoing)
MACRO Bottlenecks and shortages (ongoing)
MEDICAL China lockdowns (ongoing)
MACRO Rising commodity prices (ongoing)
GEOPOLITICS Russia and Ukraine (ongoing)
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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 June 2022
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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 19 May 2022 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. 2022.
All rights reserved. Privacy Statement
Invest in a richer life,
however you define it.
MACRO Inflation and bond yields (ongoing)
MEDICAL China lockdowns (ongoing)
MACRO Rising commodity prices (ongoing)
MACRO Bottlenecks and shortages (ongoing)
GEOPOLITICS Russia and Ukraine (ongoing)
MONETARY Central banks (ongoing)
FISCAL US and EU
stimulus (ongoing)
MEDICAL Covid-19 vaccine (ongoing)
Emerging market sovereign debt / US investment grade bonds
Emerging market sovereign debt offers additional yield over US investment grade bonds. The loss in value of Russian bond has been a drag, but that’s now behind us. Credit risks for most EM sovereigns is unaffected by the war in Ukraine.
US Investment grade bonds / Eurozone government bonds
US corporate bonds (currency-hedged) offer an attractive yield pickup over Eurozone government bonds or Gilts. Despite the mild widening year-to-date, we expect spreads to stabilize again as credit risk remains relatively low.
US equities / US investment grade bonds
We believe US stocks will outperform US investment grade bonds as the business cycle is maturing but not approaching its end, in our view. Valuations have moderated, while the all-important US domestic consumer sector is still in very good shape and corporate earnings growth remains solid.
Asian high yield bonds / Eurozone government bonds
Asian high yield bond spreads still price in a default rate above our expectations and offer significant additional yield over Eurozone government bonds. While China property fundamentals remain weak, we think default risks are well compensated for and latest signs of policy support are encouraging.
Emerging market equities / Global equities
We believe Emerging market (EM) stocks will outperform global equities as EM equities are trading close to a record discount compared to global equities. As EM growth stabilizes and monetary policy eases, especially in China, we expect EM stocks to be well supported.
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
Contact us
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 June 2022
Outlook is less certain than last month
Outlook is more certain than last month
Geopolitical uncertainty is high, commodity prices are elevated, regional lockdowns are a risk in China, central banks are on the move for now but they could turn more cautious
WHAT TO LOOK OUT FOR
Monitor
The outlook for returns from risky asset classes remains positive, even though conditions in markets remain volatile
Holding steady
Quintet portfolio
Despite a number of risks, including high inflation and rising interest rates, the global economy continues to grow at a reasonable pace
Skipping a beat but no recession
Investment focus
Source: In-house research, Refinitiv
Note: Past performance is not a reliable indicator of future performance.
Growth stocks are being impacted by higher interest rates, but the long-term fundamental outlook remains positive
When bond yields rise
Top chart
Bill Street
Group Chief Investment Officer
It’s important to remain focused on the long term and avoid over-reacting to news by adjusting portfolios in a measured way to the evolving environment
When the going gets tough
Welcome
Monitor
Portfolio
Investment focus
Top chart
Welcome
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 19 May 2022 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. 2022.
All rights reserved. Privacy Statement
Invest in a richer life,
however you define it.
Back to top
We are not making any asset allocation changes this month to our overall risk-on stance. Although the market environment is evolving, we continue to believe equities will outperform fixed income and that emerging market equities have the potential to deliver the strongest returns.
We also like US equities, which offer exposure to a high-quality companies with robust earnings, and are less vulnerable to geopolitical risks. Emerging market equities are attractively valued and should be supported by policy action.
Within fixed income we see most value in Asia high-yield bonds, supported by Chinese policy easing. Our analysis suggests emerging market sovereign bonds offer attractive valuation and carry.
We believe US inflation may have already peaked. Demand is normalising, policy is tightening and supply, over time, is likely to expand, which should combine to push down the rate of inflation. We expect this to be gradual and think a return to the negligible inflation rates of the 10 to 15 years before the pandemic is unlikely. Notably, the Fed is approaching maximum hawkishness. We think markets have priced in too many rate hikes, especially in the UK. The ECB could hike this summer, but is likely to lag other central banks.
China’s zero-covid policy is negatively impacting activity, and further raising inflation by straining supply. The purchasing managers’ surveys came below the threshold of 50 separating expansions from contractions. The good news is that infections are declining, with about 70% fewer new cases in early May compared with the peak in mid-April. Should this lead to some lifting of the most stringent lockdown measures, demand could bounce back.
The US economy contracted slightly in the first quarter, mostly because of strong imports and an inventory drawdown – a sign of solid spending. It should rebound in the second quarter
The business cycle is still expanding but is now in a more mature phase, with the pace of economic growth and business profits having already peaked. Expansion phases (where there is a good level of activity and positive momentum) are alternating with late-cycle phases (a good level of activity but negative momentum). These conditions are typical of previous cycles and are usually followed by a more marked late cycle.
We believe a US recession is unlikely over the next 12 months. If one does come unexpectedly or further down the road, it’s likely to be mild because there are few signs of the imbalances that are usually associated with deep contractions. The probability of recession is higher in the euro area given the conflict in Ukraine, while the UK is somewhere in between. China’s economy should rebound once the lockdowns ease and stimulus measures start working.
Covid-19, war in Ukraine and China’s lockdown are pushing up inflation. At different paces, central banks have embarked on a tightening path. Bond yields have risen and growth stocks are underperforming value stocks. As the expected cash flows of growth stocks tend to extend further in the future, changes in bond yields (higher) impact their present value (lower). We believe rates are likely to peak at a lower level than market expectations in this cycle. Along with our positive long-term outlook on innovation and technology, this could bring new tailwinds to growth stocks.
Investing isn’t easy right now with so much happening around the world. While we expect it to peak later this year or early next year depending on the region, inflation remains quite high right now and central banks are raising interest rates to try to bring it back down – without stunting the pace of economic growth. Many investors have been unsettled by the uncertainty and conditions in financial markets remain rather volatile across the board. In particular, the technology stocks that performed so well during the pandemic lockdowns have suffered.
Yet history shows that patience and commitment rewards investors. That’s why we’re staying focused on the long-term themes we think are likely to disrupt companies, sectors and the wider economy – such as the transition to renewable and reliable energy sources, cybersecurity, robotics and automation. At the same time, we stand ready to adjust our shorter-term strategies if warranted by changing macro or micro drivers. You’ll be able to read more about these investment opportunities when we publish our mid-year outlook over the next few weeks.
Although the pace of economic growth is slowing, we don’t think there is any need to worry about a contraction soon
Later in the cycle, but not so late
COUNTERPOINT
JUNE 2022