
For the first time in three years, Covid is not dominating the headlines as we head into the colder months, although there are still other potential risks and opportunities out there. Let’s explore the portfolio implications.
Winter is coming
COUNTERPOINT NOVEMBER 2022
Monitor
Portfolio
Investment focus
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Welcome






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Welcome
The predictable and the unexpected
Financial markets often follow standard patterns of behaviour, and we’re always looking out for any shifts in order to adjust portfolios
Recent history reminds us that the unexpected happens frequently, which can send financial markets in new directions. The global pandemic caused a sharp sell-off in share prices at the start of 2020, although they soon recovered. More recently, Russia’s invasion of Ukraine and the disruption to energy supplies has pushed up inflation to record levels. Central banks have hiked interest rates and government bond yields have risen.
Markets are also prone to throw a tantrum if they don’t like the look of something. When the UK’s new Prime Minister Liz Truss (who has recently resigned) and her Chancellor Kwasi Kwarteng announced a mini-budget of unfunded tax cuts, the pound collapsed to a record low against the US dollar, and 10-year gilt yields soared to above 4% for the first time in many years. The Bank of England had to step in to reassure investors, a new Chancellor has already reversed many of the measures and now Rishi Sunak is Prime Minister.
These events also remind us that markets tend to follow long-established patterns. Our job as investors is to keep a close eye on what’s happening throughout the world so that we can position investment portfolios accordingly. After having further reduced our exposure to eurozone and global equities while raising USD cash, we’re holding steady for now. Despite the recent market correction, valuations aren’t necessarily attractive yet. We’ll be looking for a decisive drop in inflation or a meaningful slowdown in economic activity before contemplating further shifts.

Daniele Antonucci
Chief Economist & Macro Strategist

Financial markets across many developing regions are looking relatively attractive on various measures of value
Emerging markets: challenges or opportunities?
Top chart
Interest rate hiking cycles in emerging markets (EMs) are more mature than in developed markets (DMs), which are playing catch-up. These conditions have provided a buffer to EM assets by limiting their downside during the recent market correction. The relative rate of economic growth remains stronger across many EMs, and both equity valuations and foreign exchange rates look attractive.

Source: In-house research, IMF, Refinitiv; note: past performance is not a guarantee of future performance; 2022–27 = IMF forecasts for GDP growth.
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What’s happening
A recession in the UK and the euro area now looks all but inevitable given high inflation, energy constraints, rising interest rates and the war between Russia and Ukraine. We believe a deterioration in European earnings has not been fully priced in yet. Meanwhile, higher interest rates in the US and the economic slowdown have already led to a repricing in US earnings. Any news from the Chinese Communist Party’s Congress will be critical for our emerging market investments.
The UK fiscal U-turn – followed by Liz Truss’s resignation as UK Prime Minister –is a reminder of tough policy choices. We revised our GBP trajectory higher, partly also because we now expect the Bank of England will hike more aggressively in the near term. But we still believe that our strong dollar view isn’t about return; it’s about mitigating downside risks, so we’re maintaining our exposure to this key hedge at this stage.
A dovish pivot by the US Federal Reserve – whereby the central bank slows the pace of interest rate hikes or even cuts at some point – is likely to be a key catalyst for us to revisit our exposures to high-quality fixed income and riskier assets, but we’re not there yet. While we think a peak in Treasury yields is in sight, US inflation is still too high and declining slowing, while core inflation (excluding energy and food) are still rising. The European Central Bank’s window for large hikes is closing soon as the recession deepens and borrowing costs rise.
Headline US inflation appears to have peaked. But the decline has so far been disappointing, with core inflation (excluding energy and food) not peaking yet

The asset allocation vector
Click an asset class to show the sub-asset classes


Portfolios remain positioned for uncertainty ahead
A defensive bias
What we’re doing in our portfolios
More on our views
Near-term uncertainty remains elevated, with risks skewed to the downside. The escalation of the energy crisis and oil cartel OPEC’s recent decision to cut production adds additional downward pressure on global growth and upward pressure on inflation, particularly in Europe.
Given this evolving environment, in early October we reduced our exposure to equities, with a focus on the eurozone, in favour of cash. We’re maintaining this lower equity, neutral fixed income and higher cash exposure, along with our strong (not stronger) US dollar near-term view.
We still see opportunities in trading within asset classes. We maintain our preference for more weight in US and emerging market equities. Within fixed income, we prefer emerging markets (EM) hard currency sovereigns to EU/UK government bonds.
Given that global growth is slowing, we have reassessed our exposure to EM assets. Despite a deteriorating economic outlook across the world, we think too much bad news is priced into pockets of EMs. So we’re maintaining our selective exposure within equities and bonds.

China reopening post October congress

MACRO Clear inflation / Fed / bond yields peak
FISCAL Stimulus with credible funding

MONETARY Central bank and/or government policy mistakes
POLITICS New Italian government turning EU unfriendly
GEOPOLITICS China / Taiwan / US escalation
GEOPOLITICS Russia–Ukraine War getting worse
MACRO European gas crisis deteriorating
Contact us
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 November 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 21 October 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 European gas crisis deteriorating
GEOPOLITICS Russia–Ukraine War getting worse

MONETARY Central bank and/or government policy mistakes
POLITICS New Italian government turning EU unfriendly
GEOPOLITICS China / Taiwan / US escalation

China reopening post October congress

MACRO Clear inflation / Fed / bond yields peak
FISCAL Stimulus with credible funding
Emerging market sovereign debt / Eurozone government bonds
Emerging market sovereign debt offers additional yield over Eurozone government bonds. The loss in value of Russian bond has been a drag, but that’s now behind us. Credit risk for most EM sovereigns is unaffected by the war in Ukraine.
US Cash / Eurozone Equities
Near term uncertainty remains elevated with risks increasingly skewed to the downside. We reduce our exposure to Eurozone equities and instead prefer to increase our holding in US dollar cash as we view this safe-haven asset as providing protection to our portfolios.
US equities / Eurozone Equities
We believe US stocks will outperform Eurozone stocks. With recession our base case in Europe, the stubbornly high earnings per share (EPS) expectations for euro area equities are likely to become increasingly challenged, especially relative to EPS expectations for US equities.
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 November 2022

Outlook is less certain than last month

Outlook is more certain than last month
Geopolitical uncertainty is high, commodity prices are declining but remain elevated, and US inflation may have peaked but it’s not a straight line down
WHAT TO LOOK OUT FOR
Monitor

Portfolios remain positioned for uncertainty ahead
A defensive bias
What we’re doing in our portfolios

High inflation, rising interest rates and slowing economic growth continue to dominate the investment environment
Tensions on many fronts
Investment focus

Source: In-house research, IMF, Refinitiv; note: past performance is not a guarantee of future performance; 2022–27 = IMF forecasts for GDP growth.

Swipe to see the full graph
Financial markets across many developing regions are looking relatively attractive on various measures of value
Emerging markets: challenges or opportunities?
Top chart

Daniele Antonucci
Chief Economist & Macro Strategist


Financial markets often follow standard patterns of behaviour, and we’re always looking out for any shifts in order to adjust portfolios

The predictable and the unexpected
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 21 October 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
Near-term uncertainty remains elevated, with risks skewed to the downside. The escalation of the energy crisis and oil cartel OPEC’s recent decision to cut production adds additional downward pressure on global growth and upward pressure on inflation, particularly in Europe.
Given this evolving environment, in early October we reduced our exposure to equities, with a focus on the eurozone, in favour of cash. We’re maintaining this lower equity, neutral fixed income and higher cash exposure, along with our strong (not stronger) US dollar near-term view.
We still see opportunities in trading within asset classes. We maintain our preference for more weight in US and emerging market equities. Within fixed income, we prefer emerging markets (EM) hard currency sovereigns to EU/UK government bonds.
Given that global growth is slowing, we have reassessed our exposure to EM assets. Despite a deteriorating economic outlook across the world, we think too much bad news is priced into pockets of EMs. So we’re maintaining our selective exposure within equities and bonds.
What we’re watching
The economic cycle is continuing to slow and recession odds have risen on the back of the energy crisis affecting the UK and Europe, tighter financial conditions in both those regions and the US, and geopolitical uncertainty globally. We’ve already reflected these risk when we recently further reduced our exposure to eurozone equities.
The liquidity cycle is driven by the expectation of large rate hikes at the next central bank meetings, but the pace of tightening will probably slow thereafter. The US dollar remains strong, and some central banks are being forced to defend their bond markets and currencies, particularly in the UK and Japan. Meanwhile, China continues to ease monetary and fiscal policy.
The political story in Europe is focusing on fiscal support to cushion the blow of the energy crisis. Risks of fiscal policy ‘mistakes’ (such as the recent one by the UK’s government) and geopolitics tensions (notably, the Russia–Ukraine War) are likely to continue impacting markets.
Although the northern hemisphere is heading into winter, Covid-19 doesn’t appear to pose a major threat to economic activity. New cases are on the rise again in Europe, which may be a prelude to a wave of infections. Cases are rising again in China too, after the ‘Golden Week’, triggering new lockdown restrictions across the country.
Headline US inflation appears to have peaked. But the decline has so far been disappointing, with core inflation (excluding energy and food) not peaking yet

What’s happening
A recession in the UK and the euro area now looks all but inevitable given high inflation, energy constraints, rising interest rates and the war between Russia and Ukraine. We believe a deterioration in European earnings has not been fully priced in yet. Meanwhile, higher interest rates in the US and the economic slowdown have already led to a repricing in US earnings. Any news from the Chinese Communist Party’s Congress will be critical for our emerging market investments.
The UK fiscal U-turn – followed by Liz Truss’s resignation as UK Prime Minister –is a reminder of tough policy choices. We revised our GBP trajectory higher, partly also because we now expect the Bank of England will hike more aggressively in the near term. But we still believe that our strong dollar view isn’t about return; it’s about mitigating downside risks, so we’re maintaining our exposure to this key hedge at this stage.
A dovish pivot by the US Federal Reserve – whereby the central bank slows the pace of interest rate hikes or even cuts at some point – is likely to be a key catalyst for us to revisit our exposures to high-quality fixed income and riskier assets, but we’re not there yet. While we think a peak in Treasury yields is in sight, US inflation is still too high and declining slowing, while core inflation (excluding energy and food) are still rising. The European Central Bank’s window for large hikes is closing soon as the recession deepens and borrowing costs rise.

Interest rate hiking cycles in emerging markets (EMs) are more mature than in developed markets (DMs), which are playing catch-up. These conditions have provided a buffer to EM assets by limiting their downside during the recent market correction. The relative rate of economic growth remains stronger across many EMs, and both equity valuations and foreign exchange rates look attractive.
Recent history reminds us that the unexpected happens frequently, which can send financial markets in new directions. The global pandemic caused a sharp sell-off in share prices at the start of 2020, although they soon recovered. More recently, Russia’s invasion of Ukraine and the disruption to energy supplies has pushed up inflation to record levels. Central banks have hiked interest rates and government bond yields have risen.
Markets are also prone to throw a tantrum if they don’t like the look of something. When the UK’s new Prime Minister Liz Truss (who has recently resigned) and her Chancellor Kwasi Kwarteng announced a mini-budget of unfunded tax cuts, the pound collapsed to a record low against the US dollar, and 10-year gilt yields soared to above 4% for the first time in many years. The Bank of England had to step in to reassure investors, a new Chancellor has already reversed many of the measures and now Rishi Sunak is Prime Minister.
These events also remind us that markets tend to follow long-established patterns. Our job as investors is to keep a close eye on what’s happening throughout the world so that we can position investment portfolios accordingly. After having further reduced our exposure to eurozone and global equities while raising USD cash, we’re holding steady for now. Despite the recent market correction, valuations aren’t necessarily attractive yet. We’ll be looking for a decisive drop in inflation or a meaningful slowdown in economic activity before contemplating further shifts.
For the first time in three years, Covid is not dominating the headlines as we head into the colder months, although there are still other potential risks and opportunities out there. Let’s explore the portfolio implications.

Winter is coming
COUNTERPOINT
NOVEMBER 2022