Quarterly investment letter | 2nd quarter 2022
Here’s our summary of the markets
Inflation pressure is mounting, and we face a mature business cycle with the risk of stagflation. As a result, economic downside risks are rising in the short term.
Central banks have started a new hiking cycle, weighing price stability over economic growth concerns. We see the potential for a vicious wage-price inflation spiral.
The geopolitical crisis in Europe will have a long-lasting impact, reshaping the global trade order and fostering greater unity in the West. Moreover, increased, and short-term spending on defence and renewable energy in Europe will create new jobs and support economic growth.
Rising wages, higher commodity prices, increasing interest rates, and a softer consumer demand outlook is putting severe pressure on peak profit margins in 2022. Price pressure will ease in 2023, but the war in Ukraine makes projections difficult.
Overall, we recommend a cautious stance towards risky assets. We are slightly underweight in equities but will buy on market weakness to reach a market-neutral weight. Credit spreads have already adjusted meaningfully in Q1 and are priced fairly. Corporate default rates should remain muted and not surpass historical averages. We also recommend avoiding duration-heavy bonds. Volatility will remain high during the rate hiking cycle, so active management and selection skills will be rewarded. For risk-averse investors, an Absolute Return approach is warranted.
Don’t miss our complete 2nd quarter 2022 investment letter, which includes a more detailed look at the regional macro-economic backdrop, market consensus forecasts, and more
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