House Views - February 2022
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 still healthy. Despite these risk, we expect the recovery to continue in developed economies. Growth should remain generally strong. Corporates and households healthy balance sheets remains 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. In contrast, the ECB is likely to stick to its highly accommodative policy as underlying inflation is projected to be more contained in the euro zone.
We remain Overweight on equity markets. Uncertainties may keep volatility bubbling, but it is still a supportive environment for risky assets. We retain our Overweight on the US market and Euro area, both of which still have good earnings prospects. We also remain Overweight on emerging Asia equities. China is still prey to short-term risks, but the medium-term outlook for its economy remains strong. Other emerging markets look less attractive and risk a scenario of sustained modest growth, high inflation, and political dangers.