In this month’s strategy piece Alastair George believes that the volume is being turned up to 11 in respect of the challenges facing investors this year. Inflation remains well above target in developed markets. Year to date, 2022 has seen some of the sharpest increases in short- and long-term interest rates for decades. Most recently, the UK has amply demonstrated the real-world limits on expansionary fiscal policy and the risk premium associated with political instability. The order and timing of economic events – first GDP growth, then interest rate increases, followed by inflation and unemployment are in our view key to positioning portfolios correctly with the market ‘noise’ level set so high. For example, given the increasingly rapid declines in economic activity implied by recent survey data, at some point in the next six months we believe the factors of growth and unemployment are likely to dominate current inflation concerns in developed markets. Equity overvaluation risk has however melted away. From two standard deviations above fair value a year ago, global equity markets have since de-rated and now trade close to long their long-run average price/book multiple. Furthermore, European equities – and particularly those in the UK – appear to discount to a significant degree the difficult economic period expected in 2023. However, we also recognise that earnings forecasts are declining at an accelerating rate so we remain neutral on equities but with a positive bias until there is some evidence of a slowing in the pace of downgrades. We believe yields on US government bonds are now set to moderate as the US and global economies slow over coming quarters. Even modestly declining long-term yields would be an important pressure release valve for both the US dollar and equity market valuations. Nevertheless, equities will still have to contend with pressure on profits forecasts from rapidly declining demand but only relatively slowly declining input cost pressure. In an environment where a significant and synchronised slowdown in real economic activity is our base case, even as inflation is expected to remain well above target over the next 12 months, we still believe investors should remain focused on building portfolios robust to a variety of economic outcomes. Defensive stocks with pricing power, strong balance sheets and limited exposure to war-related risks continue to represent the most attractive segments of the equity market, in our view.