
While recession in the euro area and the UK is now our base case and uncertainty remains elevated, equity markets are focusing on the decline in bond yields and the likely US inflation peak. Let’s look at what it all means for portfolios
A fine balance
COUNTERPOINT SEPTEMBER 2022
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Portfolio
Investment focus
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Welcome
as hot as the weather
Central banks have been raising interest rates for some time, causing volatile markets. We hold well-diversified portfolios to capture opportunities and weather the risks
Inflation has been as hot as the weather over the summer and central banks have been raising interest rates to cool things down, which has unsettled financial markets. More recently, though, investors have started to look forward to better days ahead as US inflation appears to have peaked and bond yields are declining, even though the chances of recession in Europe seem to have increased, which you can read about in more detail in this month’s update.
Partly because of geopolitical risks, we think markets are in a state of flux right now and we expect conditions to remain volatile for some time, which is why we’re positioned for uncertainty through well-diversified portfolios designed to capture opportunities and weather the risks. As always, we’ll be monitoring the evolving economic and investment environment closely over the rest of the year and adjusting portfolios if things change.

Daniele Antonucci
Chief Economist & Macro Strategist

With the pace of growth now slowing in the US, central bankers may have more wiggle room over monetary policy
UNDER THE HOOD
Top chart
The data the US National Bureau of Economic Research uses to measure the health of the economy suggests things are slowing down. According to these data, the US isn’t in recession, although the risks of one occurring in the next 12 months are rising. There’s also a chance that it can be averted. The Federal Reserve now has more flexibility to slow the pace of its interest rate hikes or even start to bring them back down when inflation is more under control.

Source: In-house research, Federal Reserve, National Bureau of Economic Research
Read more
What’s happening
Recession is our base case for the euro area and the UK, given rising costs and the energy squeeze. Even if economy is slowing, we are more optimistic for the US because we think inflation is already peaking. China’s reopening and stimulus are helpful. However, Covid infections are rising again and so lockdown risks remain.
In the US, core inflation (excluding energy and food) and wage growth have both slowed somewhat and inflation expectations are rolling over. Inflation in the euro area and the UK is still rising on energy and supply strains. We don’t expect consumer prices to fall, but think inflation is likely to moderate while staying higher than the depressed levels of the last 10 to 15 years.
We are maintaining our overall equity and bond weights in line with what we view to be the best long-term allocation. We still see opportunities in trading within rather than across asset classes

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


We’re sticking to our high-conviction calls but recently changed our tactical positioning
What we’re doing in our portfolios
More on our views
We became neutral on equities – in line with our long-term positioning. With recession our base case in Europe, we have a preference for the US and emerging markets equities versus euro area and global equities, respectively (see more in the “More on our views” section).
We see US equities as a high-quality asset class for several reasons. The more positive EPS upgrades for euro area vs US equities, coupled with the similar returns year-to-date, is something we believe will be increasingly challenged by investors. Additionally, historical analysis shows that US equities have tended to strongly outperform euro area equities when growth slows.
In Fixed Income, we remain overweight emerging market sovereign hard-currency bonds against low-yielding government bonds, to capture the additional yield on offer.

GEOPOLITICS US–China tensions over Taiwan (ongoing)
POLITICS Italian elections (September), US midterms (November)
MACRO Inflation and bond yields (ongoing)
MACRO Policy mistakes (ongoing)
MONETARY Central banks (ongoing)

MONETARY China reopening (ongoing)
FISCAL China / EU stimulus (ongoing)


GEOPOLITICS Russia and Ukraine (ongoing)

MACRO European gas crisis (ongoing)
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 September 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 August 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.


GEOPOLITICS US–China tensions over Taiwan (ongoing)
POLITICS Italian elections (September), US midterms (November)
MACRO Inflation and bond yields (ongoing)

MACRO Policy mistakes (ongoing)
MONETARY Central banks (ongoing)


GEOPOLITICS Russia and Ukraine (ongoing)
MACRO European gas crisis (ongoing)


MONETARY China reopening (ongoing)
FISCAL China / EU stimulus (ongoing)
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 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 September 2022

Outlook is less certain than last month

Outlook is more certain than last month
Geopolitical uncertainty is high, commodity prices ex European gas are finally declining, US inflation may have peaked-, and bond yields are coming down
WHAT TO LOOK OUT FOR
Monitor

We’re sticking to our high-conviction calls but recently changed our tactical positioning
What we’re doing in our portfolios

With the holidays now over, it’s time to focus on what’s likely to drive investment returns over the rest of the year
BACK TO BUSINESS
Investment focus

Source: In-house research, Federal Reserve, National Bureau of Economic Research

Swipe to see the full graph
With the pace of growth now slowing in the US, central bankers may have more wiggle room over monetary policy
UNDER THE HOOD
Top chart

Daniele Antonucci
Chief Economist & Macro Strategist


Central banks have been raising interest rates for some time, causing volatile markets. We hold well-diversified portfolios to capture opportunities and weather the risks

as hot as the weather
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 August 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 became neutral on equities – in line with our long-term positioning. With recession our base case in Europe, we have a preference for the US and emerging markets equities versus euro area and global equities, respectively (see more in the “More on our views” section).
We see US equities as a high-quality asset class for several reasons. The more positive EPS upgrades for euro area vs US equities, coupled with the similar returns year-to-date, is something we believe will be increasingly challenged by investors. Additionally, historical analysis shows that US equities have tended to strongly outperform euro area equities when growth slows.
In Fixed Income, we remain overweight emerging market sovereign hard-currency bonds against low-yielding government bonds, to capture the additional yield on offer.
What we’re watching
Despite equity markets recovering from their June lows, we still think near-term uncertainty remains high. That’s why we are maintaining our overall equity and bond weights in line with what we view to be the best long-term allocation. With emerging markets, particularly China, underperforming in recent weeks, we’ve reviewed our preference for emerging markets over global equities. We remain positive on the asset class given its deep discount both relative to global equities and its own history. Specifically, we see emerging market monetary policy easing, led by China, though we’re mindful of the domestic risks within the Chinese economy.
The ongoing earnings season and company forecasts are likely to continue to provide clues on the near-term outlook for the corporate sector. The next US jobs report, inflation print and round of Fed projections (all throughout September) will likely be critical to gauge how close the central bank really is to slowing the pace of tightening. While one data point doesn’t make a trend, last month’s drop in US inflation, which was more pronounced than expected, is encouraging and supports our view that bond yields have peaked, even if levels stay low. The situation in Taiwan and any possible geopolitical spillover is another risk we’re monitoring.
We are maintaining our overall equity and bond weights in line with what we view to be the best long-term allocation. We still see opportunities in trading within rather than across asset classes

What’s happening
Recession is our base case for the euro area and the UK, given rising costs and the energy squeeze. Even if economy is slowing, we are more optimistic for the US because we think inflation is already peaking. China’s reopening and stimulus are helpful. However, Covid infections are rising again and so lockdown risks remain.
In the US, core inflation (excluding energy and food) and wage growth have both slowed somewhat and inflation expectations are rolling over. Inflation in the euro area and the UK is still rising on energy and supply strains. We don’t expect consumer prices to fall, but think inflation is likely to moderate while staying higher than the depressed levels of the last 10 to 15 years.

The data the US National Bureau of Economic Research uses to measure the health of the economy suggests things are slowing down. According to these data, the US isn’t in recession, although the risks of one occurring in the next 12 months are rising. There’s also a chance that it can be averted. The Federal Reserve now has more flexibility to slow the pace of its interest rate hikes or even start to bring them back down when inflation is more under control.
Inflation has been as hot as the weather over the summer and central banks have been raising interest rates to cool things down, which has unsettled financial markets. More recently, though, investors have started to look forward to better days ahead as US inflation appears to have peaked and bond yields are declining, even though the chances of recession in Europe seem to have increased, which you can read about in more detail in this month’s update.
Partly because of geopolitical risks, we think markets are in a state of flux right now and we expect conditions to remain volatile for some time, which is why we’re positioned for uncertainty through well-diversified portfolios designed to capture opportunities and weather the risks. As always, we’ll be monitoring the evolving economic and investment environment closely over the rest of the year and adjusting portfolios if things change.
While recession in the euro area and the UK is now our base case and uncertainty remains elevated, equity markets are focusing on the decline in bond yields and the likely US inflation peak. Let’s look at what it all means for portfolios

A fine balance
COUNTERPOINT
SEPTEMBER 2022