Strategists on how to weather the market storm

The first half of 2022 has been historically bleak for global equity markets, and strategists say there are dark clouds on the horizon and some way to go before the storm blows over.

The S&P 500 closed its biggest first-half drop since 1970 last week, down 20.6% since the start of the year. European dishes Stoxx 600 end of halving 16.6% off and World MSCI down 18%.

A variety of other asset classes also suffered significant losses, including bonds. Traditional “safe haven” U.S. dollar and some items, such as oilis one of the few exceptions in the ugly six months.

Jim Reid, Head of Global Credit Strategy at Deutsche Bank“The good news is that H1 is over, the bad news is that the outlook for H2 doesn’t look good,” said in a daily research note on Friday.

That said, US stocks manage rally when the second half begins on Friday, and European markets have a positive day on Monday (a US holiday).

However, the macroeconomic outlook remains uncertain as the war in Ukraine and inflationary pressures continue, prompting central banks to embark on aggressive monetary policy tightening and exacerbating concerns about a global economic slowdown.

‘The economic regime is shifting’

In a mid-year outlook report released by CNBC, HSBC Bank Asset Management warned investors that “the economic regime appears to be changing” as adverse supply shocks persist, globalization slows and commodity prices remain “secularly high”. And all this while governments try to manage the “conversion risk” of changes in climate policy.

HSBC’s chief global strategist Joe Little calls the end of an era that economists call “secular stagnation”, characterized by historically low inflation and interest rates. From here on, he predicts more persistent high inflation, higher interest rates and a more volatile business cycle.

“Many of the trends that are consistent with the investment market are now turning into headwinds. That suggests a period of market volatility is underway,” Little said.

Emerging structural themes of de-globalization, climate policy and the commodity supercycle will drive more persistent inflation across major economies. While HSBC expects inflation to gradually cool from current multi-decade highs in many economies, Little said the “new norm” is likely to be more bullish in the medium term, leading to a period of higher interest rates.

To navigate this new era, Little suggests that investors should seek greater geographic diversification, highlighting Asian asset classes and credit markets as “earnings-enhancing factors.” interesting”.

“Real assets and other ‘new diversification tools’ can help us build resilience in our portfolios. There’s also a place to invest convictions and topical strategies. , where we can reliably identify major trends at a fair price,” he added.

‘Wrong direction’

Dave Pierce, director of the Utah-based Strategic Initiatives Foundation, told CNBC on Friday that macro forces at work mean the market is still “going in the wrong direction.” He emphasized that inflation has not peaked yet and there is no clear catalyst for oil prices to return to ground level.

He added that unless there is a solution to the war in Ukraine or oil companies can increase production – which he proposes will take at least six months and will risk bottoming out of the oil market if Russian supply is back. – price pressures that have driven central banks to act aggressively show no signs of abating.

Stock valuations have fallen markedly from their late-2021 highs, and Pierce admits they are “more attractive” than they were a few months ago, but he is continuing to re-enter the stock market positions.

“I’m not putting all my eggs back on the market right now, because I think we still have a lot of ways to go. I think there’s going to be some additional recalls that we’re going to have on the market. school , and I think that’s probably necessary,” he said.

“When you have interest rates that are exactly what they are, it’s hard to keep things steady and working and moving in one direction.”

Pierce added that the correction seen in recent months is not surprising given that the market has had “a lot of time” in the recovery from the initial Covid-19 crash to record highs. at the end of last year.

In terms of industry allocation, Pierce said he has directed his attention to items and “essentials,” such as healthcare, food and essential clothing.

Recession risk, but scope for improvement

While the investment landscape looks a bit risky, HSBC’s Little suggests that there is still room for better performance in late 2022 if inflation cools and central banks can adopt a “balanced” stance. than.

The bank’s wealth strategists believe we are currently at or near the “peak” of inflation, but the data won’t drop meaningfully until later this year. Little said his team is closely monitoring wage data for signs that inflation is becoming entrenched.

A recession-inducing hawkish monetary policy shift remains the biggest threat to this outlook, Little suggests, but the exact scenario varies by geography.

“With the global economy now in a rather late stage of the cycle, we are seeing more divergence across regions. For now, the outlook looks most precarious for Europe and the rest of the world,” he said. emerging market (EM) regions”.

In light of recent market moves, Little sees bond pricing as more attractive and says selective income opportunities are emerging on global fixed income, particularly credits. .

“We favor short-term, selective credit allocation in Europe and Asia. In the stock market, we also want to be more selective,” Little said.