Equity strategy and market outlook – July 2022

In this month’s strategy piece Alastair George believes that the risks for 2022 are now clearly visible and as a result less dangerous. Monetary policy remains on a tightening track, inflationary pressure is ubiquitous, and growth is slowing sharply in the US and Europe. Therefore, the potential for negative ‘surprises’ is diminishing. A very rapid reduction in global equity valuations this year is encouraging and underpins our neutral view on equities. Globally, forward price/book valuations are close to long-term averages. However, profits downgrades are accelerating. Consensus forecasts for 2022 are falling almost as quickly as at the start of the COVID-19 pandemic. Historically it has been a better strategy to wait until earnings forecasts are at least close to their nadir before becoming more aggressive on equities. Investors also appear to be speculating on a quick US Federal Reserve (the Fed) ‘pivot’ as growth slows. While we concur with the view that the US Fed will become less hawkish over coming quarters, inflation may not subside as quickly as investors currently expect. There remains a high degree of inflation uncertainty, given the large deviation of inflation from previously well-behaved quantitative models. We remain neutral on global equities for now. While acknowledging that equity valuations have eased considerably, medium-term inflation uncertainty remains high and the focus should remain on portfolio robustness rather than positioning for outsize returns. For global bonds, we remain concerned that any yield compression will be modest given lingering inflation uncertainty.

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