Global strategy 4Q 2022

Persistently high inflation rates and a significant increase in interest rates are weighing on economic momentum and pushing up volatility on the financial markets. In addition, geopolitical tensions are in place that favour safe-haven flows. We regard the medium and longer maturities of US Treasury bonds as attractively valued but advise to pursue a diversified investment strategy for riskier assets. We envisage a volatile sideways movement for the equity market and recommend overweighting defensive sectors.

Economy

The persistently high US inflation is eroding real household income, and the drastic increase in interest rates has a negative effect on investments, in particular on the real estate market. The US labour market remains robust with low unemployment and high demand for labour. US inflation may have peaked, but we expect a more substantial decline only from spring of 2023 onwards. The Eurozone economy is also suffering from the high inflation, albeit amid a different set of driving forces. In particular, the rapid increase in natural gas and electricity prices since 2021 is now reaching households and companies with a time lag, a growing number of which rely on governmental support to mitigate the rise in costs. In view of the challenging environment, we forecast a significantly lower momentum of growth for the Eurozone GDP in 2023. Inflation dynamics should abate in the coming year, and our base-case scenario is grounded on the assumption of lower average energy prices.

Bonds

The US Fed is continuing to tighten its monetary policy at a high pace, not the least as persistently high inflation and a robust labour market justify rapid action. While the cycle of interest rates is not yet over, questions are emerging as to when rates will peak. The yield curve has been inverted for a while now, reflecting expectations of interest rates falling again. The US bond market has been very volatile in recent months, looking for guidance. The valuation of medium and longer maturities is currently attractive. In view of the still supportive level of interest rates, the ECB has initiated a quick tightening of its monetary policy. The development of the energy crisis will be a decisive factor for the extent by which interest rates will be raised. The bond markets will remain volatile due to downside risks for the economy and upside risks for inflation. We are unlikely to see stabilisation setting in before the end of the rate hikes becomes predictable.

Currencies

The uncertain geopolitical environment and the energy crisis are weighing on the euro in particular, both against the US dollar and the Swiss franc. The latter are considered safe haven currencies. A calmer European energy markets would support the euro. Real negative yields continue to support the gold price.

Equities

The global equity market should trend sideways in 4Q, with high volatility. We expect a positive performance of the US equity market and a negative performance in Europe. Defensive sectors such as healthcare or non-cyclical consumer should be overweighted in the current environment. Quality stocks with high dividend yields are also attractive.

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