Last week in a nutshell
- Industrial activity and consumption-related data will be published in China, Europe and in the US. The figures will show how resilient private demand remains amid the persistent high-inflation context.
- Housing data in the US disappointed as the latest existing home sales dropped by 2.4% and the aggregate NAHB housing market index hit the lowest level in nearly two years. House prices jumped to a record high, hitting household’s affordability.
- Euro zone economic growth surprised slightly on the upside in the first quarter, and employment rose too. The euro zone expanded at a solid pace at the turn of the year before the war in Ukraine.
- In China, the PBoC became the first central bank to ease. In an attempt to provide support for the (overly) ambitious GDP growth target, it lowered the benchmark lending rate for loans with tenors of five years or more from 4.60% to 4.45%.
What’s next?
- Flash PMIs will be published, shedding some light on the impact of the war in Ukraine, COVID-19-related lockdowns in China and raw materials shortage on manufacturing activity. Demand for services has so far remained resilient but could become vulnerable to the high inflation.
- In the US, new home sales are the next housing indicator to follow. It will reveal how quick the demand for new homes is fading as the Federal Reserve’s monetary tightening measures have already pushed mortgage rates higher.
- Speaking of the Fed, it will publish its latest FOMC Minutes. This publication usually gives meaningful context to the monetary policy decisions made and offers clues about its longer-term intentions.
- Inflation-related data is expected from Tokyo. The nationwide core CPI inflation rose above 2% for the first time since September 2008, but non energy and food prices rose by only 0.1%. The Bank of Japan is not expected to change its ultra-loose monetary policy pending wage rising and stronger demand.
Investment convictions
Core scenario
- The reasons for a prudent allocation have not changed in recent weeks: The risks we previously outlined start to materialise, and are now part of the scenario
- Facing high inflation, central bank rhetoric and policy tools have triggered a tightening in financial conditions while the global economic slowdown is now well underway as the war in Ukraine and the COVID-19-related lockdowns in China weigh on confidence and activity
- Facing multi-decade high inflation, the Fed started its hiking cycle in March and plans to add further 100bps to its funds rate by end-July and continue tightening thereafter. 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
- Other countries may face the Bank of England (BoE) stagflation dilemma: even as the growth outlook deteriorates sharply, signs of upward pressure on inflation expectations, near-term wage and price setting behaviours remain.
- A brutal, faster-than-anticipated rate tightening - if inflationary pressures increase further or simply persist at current levels- could jeopardize any soft landing.
- The war in Ukraine is pushing upwards commodity prices in general and prices for oil and gas in particular and continue to add to markets uncertainties. European gas prices are at the mercy of flows staying open.
- As currently visible in China, COVID-19 and its variants underline the risk of a stop-and-go in economic restrictions.
Recent actions in the asset allocation strategy
Economic growth has slowed down and inflation has risen significantly, following multiple shocks. This represents a formidable business cycle accelerator. Our medium-term outlook is cautiously optimistic for a gradual recovery once the landing is absorbed. In this context, our Multi Asset strategy is positioned to cope with “fat and flat” price ranges or “wide and volatile” markets. We keep an overall broadly balanced approach before positioning for the next stage of the cycle. We are adding exposure to euro zone and US equities after the sharp correction. We maintain protective strategies on US markets and position ourselves for potential upside in the euro zone via derivatives.
Cross asset strategy
- Our multi-asset strategy is staying agile. Our current positioning stays by nature more tactical than usual and can be adapted quickly:
- Neutral euro zone equities, with a preference for the defensive Consumer Staples sector, and with a derivative strategy in place to catch the asymmetric upside potential
- Neutral UK equities, resilient segments, and global exposure
- Neutral US equities, as the Fed’s rate hike has now been absorbed to an extent by the market and with a derivative protection strategy.
- Neutral Emerging markets, with a preference for domestic China
- Neutral Japanese equities, as accommodative central bank, and cyclical sector exposure act as opposite forces for investor attractiveness
- With some exposure to commodities, including gold.
- In the fixed income universe, a longer fixed income duration appears increasingly attractive as we register downward revisions in growth, highs in inflation expectations and strong central bank rhetoric regarding the willingness to tighten and fight inflation.
- We have a close-to-neutral US duration via the short-end of the curve. We are still underweight euro zone duration.
- We continue to diversify and source the carry via emerging debt.
- In our long-term thematics and trends allocation: 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.
