Equity strategy and market outlook – March 2022

In this month’s strategy piece Alastair George who notes that the Russian invasion of Ukraine has led to a significant increase in oil and agricultural commodity prices. We are not expecting a rapid resolution to the fighting and believe sanctions on Russia are likely to be long-lasting. The war-related extent of the surge in oil prices to over $110 is over US$30 per barrel and is likely to have a meaningful impact on consumer spending. Global markets have recovered to trade at pre-war levels after an initial sell-off and US markets remain in overvalued territory. High valuations, slowing growth and tighter financial conditions are not conducive to strong equity market performance, in our view. European equity valuations are less stretched although there is relatively higher risk from sanctions on Russian energy supplies. Following the rebound in equity markets, we maintain our neutral outlook on equities. The primary concern is the new-found fervour within the US Fed and the ECB to tighten monetary policy more rapidly despite the likely slowing of economic growth induced by the surge in energy prices. Furthermore, the apparently lowered intensity of fighting in Ukraine in recent days may represent a false dawn as Russia seeks to optimise its negotiating position, both with respect to Ukraine but also internationally applied sanctions. We believe investors should become increasingly selective and seek exposure to sectors that benefit from higher interest rates and represent less cyclical earnings streams. Given the outlook for interest rates we expect global bond yields to continue to push higher and remain underweight. However, the near inversion of the US yield curve suggests that the peak in US bond yields may occur relatively early in this rate tightening cycle.

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