3Q 2022 | Guide to the Markets
Persistent inflation, persistent volatility
Elevated inflation remains at the centre of market volatility, with investors increasingly concerned that central banks will need to slam hard on the monetary brakes. The combination of higher consumer prices and interest rates will likely cause economic activity to slow during the second half of the year, and our recession monitors should be closely tracked (Guide to the Markets – UK pgs 14 & 25).
Stock markets have already priced in a lot of bad news
Slowing demand and rising costs will put pressure on corporate earnings (pgs 47 & 51). However, most major markets have already experienced double-digit declines, suggesting that a significant deterioration in earnings is already priced in (pg 65). Despite strong outperformance year-to-date, value stocks still have more scope for upside relative to growth stocks in the coming 12 to 18 months, in our view (pg 52).
Falling inflation would ease the pressure on central banks and bond markets
So long as inflation moderates alongside slowing activity, central banks should be able to ease back from their extreme hawkish rhetoric in the first half of 2022 (pgs 7 & 10). Bond yields could still rise further but risks are now more balanced and, after such a significant reset, bonds are more attractive than they were at the start of the year (pgs 67 & 73).
Humility in forecasting, balance in portfolios
Significant uncertainties remain, not least the timing of the inflation peak and the central banks’ patience in allowing inflation to persist above target (pg 8). Europe would also face a very challenging winter if its gas supply from Russia is disrupted (pg 32). Portfolios can benefit from balance, as well as allocations to macro funds (pg 77), core real estate and infrastructure (pg 78) to bolster against recession and inflation risks.