We open with a strategy piece by Alastair George, who believes that overvalued equity markets, such as the US, are progressively digesting the removal of accommodative monetary policy expected during 2022. The appropriate valuation level for global equities in a rising interest rate environment remains the dominant question for investors. Real interest rates have been rising while inflation expectations remain stable. This is a signal that despite high current inflation readings, central bank credibility in the eyes of the market remains intact. Russia has now embarked on a full-scale invasion of Ukraine. Investors should position portfolios to avoid the direct impact of potentially long-lived sanctions on Russian markets, despite discounted valuations. Russia’s foreign policy remains on a collision course with the international community and severe and potentially long-term economic sanctions are on the agenda. A spike in energy prices raises the spectre of further upward pressure on headline inflation. In such a scenario, the predicament for monetary policy will be an ever-increasing divergence between current inflationary pressure and the increased likelihood of an economic slowdown. We believe this tension is already in evidence in the bond market with long-term market-implied inflation expectations declining in recent weeks, even as nominal bond yields have risen European and ‘old economy’ sectors still appear better hunting grounds for returns in 2022. We continue to see the potential for European markets to outperform the US on valuation grounds. We expect energy sector profits to be supported by strong oil prices while financials should continue to benefit from rising interest rates. While non-US equities are not ‘cheap’ in absolute terms, many sectors are trading only a little above historical valuation norms and are priced to offer returns well above domestic bond yields. We maintain a neutral outlook on global equities for 2022 and expect the year-to-date sector and regional rotation in relative performance to continue, albeit perhaps at a slower pace, during the year.
We welcome any comments/suggestions our readers may have.
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