House Views - August 2022 - From inflation fears to recession worries

Growth at risk, particularly in Europe. Inflation is still running high and the need for central banks to tighten policy in response is casting a shadow over growth prospects. True, there are a number of support factors still in play – buoyant labour markets and plentiful savings – but activity will nonetheless slow sharply in coming quarters. In the United States, the rapid rise in interest rates pushed through by the Federal Reserve could depress activity to modest levels (“technical recession”). In Europe, the position is more fragile. There is now a clear and present danger of further deep cuts to Russian energy supplies. Such a shock could trigger a sharper downturn in economic activity, particularly in certain countries like Germany and Italy. China, in contrast, looks like an exception, poised for a strong recovery in its economy thanks to a gradual easing of Covid restrictions and accommodative policies.

Increased prudence in our investment strategy. We further reduce our exposure to equity markets, reducing holdings of euro zone shares in the face of the specific risks to economic activity in the region. At the same time, we continue to raise our exposure to bond markets, moving from Underweight to Neutral on high-rated corporate debt in developed markets. Yields are now looking attractive and companies are sitting on generally healthy balance sheets. Lastly, we are maintaining our Overweights to hedge funds and also gold, both still attractive alternatives in uncertain times.

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