House Views - Seeking returns in an uncertain world - December 2022

Developed economies now look firmly set to slow in 2023. Inflation continues to chip away at household purchasing power and rising interest rates are depressing property markets and corporate investment. On top of which Europe continues to feel the effects of the energy crisis. These headwinds, though, are still partly offset by support factors that limit the risk of an overly dramatic slowdown. Household and company finances remain generally solid, with substantial savings and labour markets going from strength to strength. In the euro zone, supportive budget measures have eased the impact of the energy crisis for companies and the hardest hit families. What is more, ongoing doubts around China's zero Covid policy have helped keep oil prices at moderate levels.
 
Central banks are watchful. Inflation looks to have peaked in the United States and euro zone and will fall off steeply in 2023 as the initial surge in energy and durable goods prices comes out of the comparison base. However, these base effects aside, underlying inflation may take time to follow suit as pressures feed through to salaries and service prices. Central banks will continue to tighten policy in the short term before calling a halt. They are likely to stick to their hawkish tone until sure that inflation has been brought back to near target for the long term.
 
Quest for yield. We retain the broadly cautious tone of our investment strategy and our equities Underweight. However, we feel the risk of an extreme scenario has receded, leading us to raise exposure in certain markets. For instance, we have increased exposure to high-rated corporate debt to cash in on the higher interest rate environment. We have also added exposure to the euro zone equity market, to play its bias toward rate-insensitive sectors. At the same time, we are slightly Overweighting the euro against the dollar and cutting back our exposure to hedge funds.
 

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