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Central bank policy is the dominant theme for investors at the moment with the frequency and magnitude of interest rate hikes driving the outlook for returns

Hawks and doves 

COUNTERPOINT MAY 2022

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Welcome

Spring is in the air 

The global economy continues to heal from the pandemic but will inevitably experience some unsettled periods along the way

A spell of warm weather around Easter time can be deceptive. You’re out in a T-shirt enjoying the sunshine one day and then back in your winter coat the next as the temperature dips back down. In a similar way to how the changing of the seasons doesn’t happen smoothly, economic conditions are often unsettled during a period of transition – like the one taking place now as central banks tighten monetary policy with a series of interest rate rises. 

There are many factors for rate setters to consider, including quite a few uncertainties, such as persistently high inflation, China’s zero Covid stance and global supply chain disruptions. The devastating war in Ukraine and humanitarian crisis is also a stark reminder that the world order can quickly become unbalanced. We’ll be exploring many of these issues and what they mean for financial markets in our mid-year outlook, which will be published in June. 

Bill Street
Group Chief Investment Officer

An inverted yield curve often suggests a recession is on the way but we think the probability is low

Upside down 

Top chart

The yield on some longer-dated US Treasuries dropped below that on shorter-dated bills recently. An inverted yield curve is often a powerful economic omen of a upcoming recession but our calculations suggest it’s unlikely over the next 12 months. The probability increases over long time horizons and it will inevitably happen at some point. Yet we believe it’s likely to be mild because the US lacks the financial imbalances that are usually associated with a sharp contraction.

Source: Quintet, Federal Reserve for US recession periods (shaded areas)

The global economy continues to recover despite risks to the outlook. They include the conflict between Russia and Ukraine, China’s zero Covid approach and strained global supply chains. There’s also the possibility that central banks could make a mistake by hiking interest rates too quickly. Although the euro area could weaken, we believe economic actively will remain resilient, particularly in the US, while forthcoming policy stimulus should provide some relief from lockdowns in China.

At this point in the business cycle, we believe the pace of economic expansion and company earnings growth has already peaked, even though both remain positive. Inflation remains high for a variety of reasons, but may already have peaked too, and is likely to fall as demand normalises, supply expands and government stimulus measures wane. As inflation rose strongly last year, the mathematical comparison with a year ago – comparing this year inflation figures to last year – will also help to push down the annual figures.

The Fed is hawkish. We now see more rate hikes and higher bond yields in the near term. But, when growth weakens and inflation moderates, we expect the central bank to slow

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

Despite some near-term uncertainty we continue to have a positive outlook for the returns from risk assets

Holding steady

Quintet portfolio

The sharp rise in global bond yields has weighed heavily on fixed income returns in recent weeks. Bond markets have by now priced in a hawkish policy outlook for the Fed. In particular, we think US investment grade credit has become more attractive, with yields above 4% and spreads around their long-term median. We have reduced our underweight allocation, while increasing the underweight in European government bonds, where yields remain comparatively low. More generally, we’re retaining our moderate risk-on allocation in portfolios. Our most preferred regions tactically remain the US (via equities) and emerging markets/Asia (via equities and credit). 

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)

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 May 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 21 April 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

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 May 2022

Outlook is less certain than last month

Outlook is more certain than last month

Geopolitical uncertainty is high, commodity prices are rising, regional lockdowns are a risk in China, central banks are on the move for now but they could turn more cautious, and fiscal stimulus should increase

WHAT TO LOOK OUT FOR

Monitor

Despite some near-term uncertainty we continue to have a positive outlook for the returns from risk assets

Holding steady

Quintet portfolio

We’re expecting extra Fed rate hikes and higher bond yields, but the liquidity cycle should tighten more slowly once growth and inflation normalise

Getting back to normal 

Investment focus

Source: Quintet, Federal Reserve for US recession periods (shaded areas)

An inverted yield curve often suggests a recession is on the way but we think the probability is low

Upside down 

Top chart

Bill Street
Group Chief Investment Officer

The global economy continues to heal from the pandemic but will inevitably experience some unsettled periods along the way

Spring is in the air 

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 21 April 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.

The sharp rise in global bond yields has weighed heavily on fixed income returns in recent weeks. Bond markets have by now priced in a hawkish policy outlook for the Fed. In particular, we think US investment grade credit has become more attractive, with yields above 4% and spreads around their long-term median. We have reduced our underweight allocation, while increasing the underweight in European government bonds, where yields remain comparatively low. More generally, we’re retaining our moderate risk-on allocation in portfolios. Our most preferred regions tactically remain the US (via equities) and emerging markets/Asia (via equities and credit). 

Looking up
The US Federal Reserve (Fed) is in a hawkish mood, with the result that there are likely to be more rate hikes and higher bonds yields in the near term. When growth weakens and inflation moderates, we expect the central bank to slow the pace of its tightening programme. We also believe US policymakers will avoid making a mistake by increasing rates too aggressively, and we’re more dovish than market expectations for European Central Bank and Bank of England policies.

Geopolitical risks remain, which are dominated by the war in Ukraine and economic sanctions against Russia. Energy and commodities markets are volatile and the high price of many raw materials, as well as the disruption to supply, could keep inflation higher for longer. We’re also watching for any possible economic and market implications from the recent presidential election in France, though we suspect they’ll matter more over the longer term. 

The Fed is hawkish. We now see more rate hikes and higher bond yields in the near term. But, when growth weakens and inflation moderates, we expect the central bank to slow

The global economy continues to recover despite risks to the outlook. They include the conflict between Russia and Ukraine, China’s zero Covid approach and strained global supply chains. There’s also the possibility that central banks could make a mistake by hiking interest rates too quickly. Although the euro area could weaken, we believe economic actively will remain resilient, particularly in the US, while forthcoming policy stimulus should provide some relief from lockdowns in China.

At this point in the business cycle, we believe the pace of economic expansion and company earnings growth has already peaked, even though both remain positive. Inflation remains high for a variety of reasons, but may already have peaked too, and is likely to fall as demand normalises, supply expands and government stimulus measures wane. As inflation rose strongly last year, the mathematical comparison with a year ago – comparing this year inflation figures to last year – will also help to push down the annual figures.

The yield on some longer-dated US Treasuries dropped below that on shorter-dated bills recently. An inverted yield curve is often a powerful economic omen of a upcoming recession but our calculations suggest it’s unlikely over the next 12 months. The probability increases over long time horizons and it will inevitably happen at some point. Yet we believe it’s likely to be mild because the US lacks the financial imbalances that are usually associated with a sharp contraction.

A spell of warm weather around Easter time can be deceptive. You’re out in a T-shirt enjoying the sunshine one day and then back in your winter coat the next as the temperature dips back down. In a similar way to how the changing of the seasons doesn’t happen smoothly, economic conditions are often unsettled during a period of transition – like the one taking place now as central banks tighten monetary policy with a series of interest rate rises. 

There are many factors for rate setters to consider, including quite a few uncertainties, such as persistently high inflation, China’s zero Covid stance and global supply chain disruptions. The devastating war in Ukraine and humanitarian crisis is also a stark reminder that the world order can quickly become unbalanced. We’ll be exploring many of these issues and what they mean for financial markets in our mid-year outlook, which will be published in June. 

Central bank policy is the dominant theme for investors at the moment with the frequency and magnitude of interest rate hikes driving the outlook for returns

Hawks and doves 

COUNTERPOINT
MAY 2022

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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