Last Week in a Nutshell
- Regional divergences among central banks are starting to appear. After stating last February, it would not raise rates before 2024, the Swedish Riksbank just did so (by 25bps to 0.25%). Meanwhile, the Bank of Japan will keep buying bonds. The JPY depreciated against the USD to levels not seen since 2002.
- Euro zone Consumer Prices increased by 7.5% YoY in April and will make ECB policymakers very uncomfortable. Core CPI, which strips out the impact from food, energy, alcohol and tobacco, accelerated much quicker, thereby increasing the odds of a first interest rate hike by the ECB on July 21st.
- Despite a soft headline Q1 GDP (-1.4% annualized rate), nominal GDP increased at a strong 6.5% QoQ annual rate, thereby contributing to the rise in S&P 500 profits.
- Russia's state-owned gas company, Gazprom, informed Bulgaria and Poland that only roubles could buy Russian gas. Russia is fighting sanctions while the EU is eager to become increasingly energy-independent.
What's Next?
- In the FOMC’s subsequent press briefing, Fed Chair Jerome Powell will explain the size of the interest rate hike. The central bank is accelerating its tightening, aiming for an inflation level back in line with its target without jeopardizing the economic recovery.
- The Bank of England will meet for the third time this year. A fourth successive hike by 25bps is expected in market forecasts. Supporting the BoE’s tightening stance, April's flash UK PMI survey pointed to rising inflationary pressures.
- April Global PMI data releases will provide an update on the health of the economy. Recent soft data implied further deterioration ahead in the manufacturing PMI led by a slowdown in new orders’ growth and a fall in global trade.
- The US job report will be published. While hourly earnings are expected to rise by 5.5%, the unemployment rate is expected to remain at 3.6%.
Investment Convictions
Core scenario
- Measures taken by governments and accumulated savings during the pandemic could help cushion the erosion of household purchasing power and allow GDP to grow by 2.9% in 2022 in the euro zone. A cut in natural gas delivery from Russia would however represent a major downside risk for growth.
- The Fed started a new hiking cycle in March and plans to accelerate tightening this year and continue in 2023. In our central - and best case - scenario, the Fed succeeds in soft landing the economy. We expect the rise in the US 10Y rates to fade going forward.
- In Europe, inflation is at record highs, hitting businesses, consumers, and ECB policymakers alike. The ECB puts an end to its Pandemic Emergency Purchase Programme and announced it will stop buying bonds this summer. This paves the way for an increase in interest rates sooner rather than later.
Risks
- The Russian war in Ukraine is pushing commodity prices in general and prices for oil and gas in particular and continue to add to market uncertainty.
- As currently visible in China, COVID-19 and its variants underline the risk of a stop-and-go in economic restrictions.
- The supply shock due to geopolitical tensions may weigh on activity and corporate earnings growth. In the US, input cost pressure continues too, via rising wages.
- By the same token, a brutal, faster-than-anticipated rate tightening - if inflationary pressures increase further or simply persist at current levels- could jeopardize the recovery.
Recent actions in the asset allocation strategy
Exiting the pandemic, entering the war and global tightening monetary policies act as a formidable business cycle accelerator. The various shocks registered over the past weeks have modified – and, to some extent, clarified – the market’s assessment: The shocks have not fallen equally around the world and Europe appears the most vulnerable. Our Multi Asset strategy is adjusting. Our equity exposure remains broadly balanced, with some exposure to commodities, including gold and a preference for defensive sectors such as healthcare and consumer staples. A longer fixed income duration appears increasingly attractive as we expect growth to fade and inflation expectations to remain high while central banks will pursue their tightening stance.
Cross asset strategy
- Our multi-asset strategy takes into account the acceleration towards end-cycle: We stay neutral equity but with nuances:
- Neutral equity with some exposure to commodities, including gold.
- Underweight US equities as we see growth stock valuations at risk in a context of rising inflation and rates.
- Overweight Emerging markets, specifically via China (rebound of credit impulse) and Latin America (support from rising commodity prices).
- In the fixed income universe: In a context of fading growth, inflation expectations remain high while central banks will remain on a tightening path, a longer fixed income duration appears increasingly attractive.
- We continue to diversify and source the carry via emerging debt.
- In our long-term thematics and trends allocation: The Russian invasion of Ukraine has started to shift governments’ spending priorities in terms of energy independence and defence. Hence, while keeping a wide spectrum of long-term convictions, we will favour Climate Action (linked to the energy shift) and keep Health Care, Innovation, Demographic Evolution and Consumption.
- In our currency strategy, we are positive on commodity currencies:
- We are long CAD.
