House Views - July 2022

ON A THIN LINE

Change in tone by central banks shakes economic prospects. Central banks are increasingly worried by inflation. Economic activity seems to be holding up against successive price shocks, suggesting inflationary pressures will spread across all goods and services prices. It would now take a major fall in the inflation figures to head off the clampdown by monetary authorities. Short term, we could see such a fall if oil prices drop, but this is hard to imagine in the current geopolitical environment. A real easing of pressure on production chains could have the same effect, but this looks equally unlikely as Chinese zero-Covid policy drag on. A final possibility would be a decline in global demand, and this could be deliberately engineered by tightening monetary policy. The problem for central banks is how to find the balance between tightening enough to slow the economy without tipping the economy into recession. And the sweet spot is shrinking day by day.

Greater prudence in our investment strategy. We are maintaining exposure to equity markets, reflecting the slump in stock prices by trimming equities exposure from Neutral to Underweight. One exception: we are raising weightings to emerging market equities from Underweight to Neutral, to take advantage of some cheap-looking valuations. At the same time, with risks to economic activity on the rise and sovereign yields looking attractive, we are moving from Underweight to Neutral on the Sovereign bonds of developed economies. Lastly, we are maintaining our Overweights to hedge funds and gold, both still attractive alternatives in uncertain times.

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