February 2022 - Monthly House Views
Favourable perspectives behind turbulent markets
In developed economies, financial market volatility has spiked, and equities drifted down since the turn of the year. Investors’ main concern right now is how monetary authorities will react to longer than expected high inflation prints, with fears they may ultimately be forced to act in ways that hamper recovery. Another worry is that rising tensions around Ukraine could put sustained pressure on energy prices. Such pressures, feeding into an already pumped inflationary environment, could force a sharper tightening of monetary policy with a yet harsher impact on economic activity.
Fundamentals are still healthy. Despite these risks, we expect the recovery to continue in developed economies. Growth should remain generally strong. Corporates’ and households’ healthy balance sheets remain a supportive factor. Financial conditions will be another ongoing plus, with real interest rates still negative. Inflation is likely to tail off over the year, although it could stay above central bank targets for some months yet. Central banks will continue to normalise their monetary policy. The Federal Reserve, for instance, looks set to start winding down its balance sheet and raising policy rates as soon as March. In contrast, the European Central Bank is likely to stick to its highly accommodative policy as underlying inflation is projected to be more contained in the Eurozone. The Bank of England has again raised interests rates by another 25 basis points and will begin with “passive” quantitative tightening – not actively selling Gilts back to investors but holding them until they mature.
We remain marginally overweight on equity markets. Uncertainties may keep volatility bubbling, but it is still a supportive environment for risk assets. Despite momentum deteriorating, the economic outlook remains healthy. We retain our overweight to the UK market and Eurozone, both of which still have good earnings prospects. We have reduced our exposure to Japan where lacklustre growth and high Covid levels have dampened its recovery. We continue to hold a stable of diversifiers in our portfolios, notably Gold and our proprietary Tail Risk Protection Note.
Process and Convictions
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Unless otherwise specified, all statistics and figures in this report were taken from Bloomberg and Macrobond on 01/27/2022.