The economic cycle has turned negative, driven by increased inflationary forces and geopolitical issues. The US economy could experience a period of stagflation, the eurozone most likely a mild recession, and China will be held back by its inadequately implemented Covid policies and regulatory measures.
In the US, macro data continued to point to a resilient economy with consumer spending and labor markets showing signs of strength.
Europe is expected to fall into recession in the fourth quarter of 2022. The inverted yield curve in German bond markets also suggests that Europe’s leading economy is heading for recession.
China’s economy will miss its GDP growth target of 5.5% for 2022. Latest estimates point to a decline of Chinese GDP growth to 3.2% in 2022. This would be the weakest pace since the 1970s, had the pandemic not broken out in 2020.
Conclusion: Market volatility will remain elevated given the uncertain economic backdrop we have to deal with. In such a market environment, agile and tactical portfolio management is crucial, as things can change rapidly. At current valuation levels and from a risk/return perspective we prefer selective credit over equities. Hence, we maintain our small under-weight position in equities. We consider non-cyclical short-term high yield bonds with yields of 8% as very attractive and hold duration risk primarily as a portfolio diversifier. It is an environment in which an absolute return approach is preferred vs. a classic relative value mandate.
