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Strategists on how to weather the market storm

A trader works on the floor of the New York Stock Exchange (NYSE), June 27, 2022.

Brendan McDermid | Reuters

The first half of 2022 has been historically bleak for global equity markets, and strategists believe there are dark clouds on the horizon and there is still some way to go before the storm rolls in. ended.

The S&P 500 closed its biggest first-half decline since 1970 last week, down 20.6% year-to-date. The pan-European Stoxx 600 ended the half down 16.6% and the MSCI World fell 18%.

A range of other asset classes also posted significant losses, including bonds. The traditional “safe haven” US dollar and some commodities, such as oil, were among the few exceptions to an otherwise dire six months.

Jim Reid, head of global fundamental credit strategy at Deutsche Bank, said in a daily research note on Friday that for investors, “the good news is that the first half of the year is now over, the bad news is that the outlook for the second half are not looking good”.

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That said, US stocks managed a rally early in the second half on Friday, and European markets had a positive day on Monday (a US holiday).

However, the macroeconomic outlook remains particularly uncertain as the war in Ukraine and inflationary pressures persist, prompting central banks to embark on aggressive monetary policy tightening and heightening fears of a global economic slowdown.

The “economic regime is changing”

In a mid-year outlook report seen by CNBC, HSBC Asset Management informed 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 as governments try to manage the “transition risks” of changes in climate policy.

HSBC’s chief global strategist Joe Little has called the end of an era of what economists have dubbed “secular stagnation”, characterized by historically low inflation and interest rates. Going forward, he predicted more persistent high inflation, higher interest rates and more volatile business cycles.

“A lot of tailwinds for investment markets are now becoming headwinds. This points to a phase of continued turbulence in the markets. Investors will need to be realistic about return expectations, and they will need to think more about diversification and portfolio resilience,” Little said.

Emerging structural themes of de-globalization, climate policy and a commodity super cycle will lead to more persistent inflation in major economies. Although HSBC expects inflation to gradually ease from its current multi-decade highs in many economies, Little said the “new normal” should be stronger price increases over the medium term, leading to a phase of higher interest rates.

To navigate this new era, Little suggested that investors seek greater geographic diversification, highlighting Asian asset classes and credit markets as “attractive income enablers”.

“Real assets and other ‘new diversifiers’ can help us build resilience into portfolios. There is also a place for conviction investing and thematic strategies, where we can identify credible megatrends at price points. reasonable,” he added.

“Went in the wrong direction”

Dave Pierce, director of Utah-based Strategic Initiatives, told CNBC on Friday that the macroeconomic forces at play meant markets were still “headed in the wrong direction.” He pointed out that inflation had yet to peak and there was no apparent catalyst for oil prices to come back to ground.

He added that unless there is a resolution to the war in Ukraine or the oil companies are able to increase production – which he said would take at least six months and run the risk that the bottom will fall from the oil market if Russian supply returns. – the price pressures that prompted central banks to act drastically show no signs of easing.

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

“I’m not putting all of my eggs back in the markets right now, because I think we still have a ways to go. I think there will be additional retracements that we have in the market, and I think that’s is probably needed,” he said.

“When interest rates are doing what they are, it’s really hard to keep things steady and working and going in one direction.”

Pierce added that the correction seen in recent months was not surprising given the “periods of plenty” markets enjoyed during the rebound from the initial Covid-19 crash to hit record highs at the end of the month. last year.

In terms of sector allocation, Pierce said he had focused his attention on commodities and “necessities”, such as health care, food and essential clothing.

Recession risks, but room for improvement

Although the investment landscape looks somewhat perilous, HSBC’s Little suggested there is room for better performance later in 2022 if inflation cools and central banks are able to adopt a more “balanced” position.

The bank’s asset management strategists believe we are now close to the “pain peak” of inflation, but the data won’t come down significantly until the end of the year. Little said his team is watching payroll data closely for signs of entrenched inflation.

A hawkish monetary policy shift triggering a recession remains the biggest threat to that outlook, Little suggested, but the precise scenario varies by geography.

“With the global economy now at a fairly late stage in the cycle, we are seeing greater divergence across regions. For now, the outlook looks most precarious for Europe and parts of emerging markets (EM)” , did he declare.

In light of recent market movements, Little identified bond valuations as more attractive and said selective income opportunities were emerging in global fixed income securities, particularly credits.

“We favor short-duration credit allocations, selectively in Europe and Asia. Within equities, we also want to be more selective. We continue to focus on value and defensives but we remain attentive to the possibility of ‘another style rotation, if bonds stabilize,’ Little said.

Mary Cashion

The author Mary Cashion