House View - April 2022
The economic and geopolitical environment has evolved rapidly in the past three months. The human impact of Russia’s military aggression towards Ukraine is real and immediate and we join all those who strongly condemn their actions and lament the unnecessary loss of innocent life.
For financial markets, the conflict in Ukraine and resultant humanitarian shock has dominated investor thinking. Longer term though, the prospects for growth, inflation and interest rates will once again take centre stage.
We summarise our views on the investment outlook as follows:
Growth a bit lower, inflation a bit higher
With Russia and Ukraine accounting for approximately 2% of global GDP and trade the direct economic impact of the conflict is relatively mild. However there are second order effects that undoubtedly will temper the pace of economic activity this year.
The most significant of these is through the commodity channel. With energy costs rising sharply, inflation is now likely to persist at elevated levels into the second half of 2022, before gradually moderating.
The US economy is proving the most resilient
The headwind of higher energy and food prices is expected to be more tolerable for the US. Current evidence suggests that a recession is unlikely over the next year in spite of the negative impact of additional inflation pressures and consequential higher interest rates.
The European economy came into the crisis with weaker momentum, suffering a larger Omicron-related headwind during the winter months. Now, closer proximity to the conflict is weighing on business and consumer confidence whilst inflation continues to rise.
Emerging economies are also in a tight spot, with consumer spending particularly sensitive to food and energy costs. In China, a zero-covid policy is proving difficult to enforce as outbreaks of highly transmissible variants keep rolling lockdowns a burden on the economic recovery.
Investment strategy - Implications
Markets are likely to remain volatile, with geopolitical and economic uncertainty higher than normal. This means selectivity and portfolio resilience are crucial.
In pursuit of long term real returns, the merits of equity and credit allocation remain compelling. We continue to see drivers of positive earnings growth and low corporate defaults this year.
Our portfolio stance favours equities and credit over government bonds, US and UK equities over Europe, China bonds and broad credit over emerging market debt, and physical gold as an effective hedge.
Our long term global philosophy supports continued engagement with risk assets, although we are operating with a heightened level of vigilance for signs of economic deterioration that might warrant a more defensive stance.
Find out more about Stonehage Fleming's Investment Management offering
Disclaimer: This article has been prepared for information only. The opinions and views expressed on any third party are for information purposes only, and are subject to change without notice. It is not intended as promotional material, an offer to sell nor a solicitation to buy investments or services. We do not intend for this information to constitute advice and it should not be relied on as such to enter into a transaction or for any investment decision. Whilst every effort is made to ensure that the information provided is accurate and up to date, some of the information may be rendered inaccurate in the future due to any changes. © Copyright Stonehage Fleming Investment Management 2021. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without prior written permission.
Email