Cross Asset Investment Strategy - July/August 2022

The current repricing is a reminder of a regime shift in which stagflationary concerns are becoming prominent. Investors should move towards quality segments in credit and equities, and aim to benefit from the regional divergences that allow us to prefer US (over Europe) and now Chinese equities, but strong selection is important. In FI, we suggest moving towards a neutral duration stance, but keeping an agile view, and on credit, we favour high quality debt as earnings could come under pressure. Overall, a well-diversified stance that explores non-traditional areas such as commodities, and strategies with low correlation to equities and bonds are favoured.”

A sharp economic slowdown seems to be looming in both Europe and the US, which would make bond markets attractive again, especially in the US. Conversely, the Chinese economy is expected to reaccelerate. International monetary system set to become multipolar as geopolitical factors are likely to prevail.

While not envisaging any systemic risk propagating across emerging markets, the macro financial outlook remains challenging amid growth concerns, still-high inflation and tighter global financial conditions. The current geopolitical environment, with its impact on macro and financial conditions, is making an idiosyncratic crisis more likely.

The ECB is determined to tighten its monetary policy in the face of record high inflation levels. However, it is addressing that risk by cooling inflation down or pushing the economy into recession or triggering a spike in peripheral debt borrowing costs, as in 2012. The markets are already sounding the alarm about what may lie ahead. Italian government bond yields jumped past 4% this month for the first time since 2014 as investors are concerned about the ECB’s first step in normalising its monetary policy.

We keep the probabilities of our central and alternative scenario unchanged versus last month but amend the narrative to take into account the evolving geopolitical situation (see Ukraine crisis tree).

Macroeconomic Picture by area and Macro and Market forecast.