4 min read 20 Apr 22
Looking ahead, we think it is important to remember the path of economic activity prior to Russia invading Ukraine. The global economy was on track to accelerate sharply on re-opening after COVID restrictions and a recovery in the service sector. The key change from the war is that higher energy prices will mean less disposable income for consumers. This means the means the risk of stagflation (slowing growth and higher inflation) has become more pronounced.
The war between Russia and Ukraine will remain a key factor in short-term market movements. We have chosen to maintain a mildly pro-growth stance. The US and Eurozone economies had solid foundations prior to the war in Ukraine, however the surge in energy prices will generate some drag, especially in Europe. If there is a resolution to the Russia-Ukraine war, the focus of investors will return to inflation – which was the primary risk factor that was driving global markets (and central banks) prior to the war.
We have reduced the overweight to equities and are now neutral relative to the Strategic Asset Allocation (SAA). Within equities, we have added to US equities and are overweight. We believe the US economy and financial market is better insulated from the global economic slowdown. Additionally, US companies are so far able to maintain margins suggesting the hit to earnings per share from higher inflation will be less pronounced than other regions. We have reduced European Equities and are underweight. Europe has a high weighting to GDP sensitive sectors such as industrials and financials. We think there is a risk of a sizeable economic deceleration as a result of a prolonged period of high energy prices. We have reduced the overweight to UK and Emerging Market Equities and are now neutral these allocations. We see the UK market as fairly valued and favour other developed market equities such as U.S. Regarding Emerging Market equities, headwinds in the form of higher inflation pressures and tighter policies will hamper growth, hence the neutral stance. We are underweight Fixed Income - specifically higher quality Bonds, such as Gilts and UK Investment Grade Bonds. We expect yields to be dictated by central bank policy and inflation. Bonds with higher duration will struggle as rates rise to counter the effective of inflation. We are underweight Investment Grade Bonds amid tight spreads and interest rate risk. With bond and equity market volatility expected to remain high for the next 3-6 months, we remain overweight cash.
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