Q3 2022 Outlook & Market Views

Looking ahead, we believe financial markets are likely to remain volatile as financial conditions continue to tighten and economic growth weakens. The inflation outlook remains uncertain and as such central banks are inclined to raise interest rates more quickly than in prior cycles. Market pricing of rates and inflation suggest an expectation that the Federal Reserve will follow through with its intentions to raise interest rates over the coming months but at a cost of a contraction of output. The risk for equities and bonds heading into H2 is that the expected slowdown in inflation fails to materialise while the economy continues to slow. The economic side effects of the continuing war in Ukraine on energy and commodity markets as well as the scars on supply chains left by COVID-19 provide additional complexity.

Relative to the strategic asset allocation for each portfolio, we are taking the following views:

• We hold more in listed infrastructure equities. Infrastructure equities can act as a good diversifier and provide inflation protection characteristics. Listed Infrastructure equities consist of companies that are listed on a stock exchange and earn a significant portion of their revenues from developing and operating critical physical infrastructure. This includes toll roads, airports, water systems, and energy infrastructure. The advantage is that demand tends to be stable for these services and the prices are often linked to inflation. In the current environment, we believe this area will outperform other equity sectors. Where our portfolios do not have infrastructure in the strategic asset allocation, we maintain an overweight allocation to cash, as a diversifier to Equities and Bonds.
• We have less in European and UK corporate bonds. We think Europe and UK are set to face significant policy challenges as authorities try to manage rising inflation and stagnant economies. We think rates could go up higher particularly in the Euro area. Higher rates cause the capital values of bonds to rise, as the value of future interest payments falls.
• We have more in US equities. We believe the US economy is better insulated from the global economic slowdown than other regions. Additionally, US companies are so far able to maintain margins suggesting the hit to earnings from higher inflation will be less pronounced than other regions.
• We have less in European equities. 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 are neutral on equities overall. In our view, it is still too soon to position for a rebound in risk assets, as there are some risks that have not been fully priced in.  We continue to monitor market moves carefully and will adjust our allocations as the economic outlook changes.