Mosaique Views: Markets in perspective

September / october 2022

Markets are still grappling with interest rate and geopolitical risk

Our thoughts remain with those hurt by the dreadful conflict still raging, which puts our economic concerns firmly into perspective.

In the last month, those concerns have nonetheless become a little more pressing. Inflation and interest rates have yet to peak, and growth is slowing.

However, the severity of the downturn is still unclear. Europe is most at risk from higher energy costs, and in many cases from energy supply shortfalls this winter. As yet, however, despite widespread expectations of an imminent and sharp recession, forward-looking data have been slowing gradually, and governments seem likely to act further to protect poorer households from the worst of the energy squeeze.

Elsewhere, the important US economy is less exposed, and enjoys some underlying momentum (despite its poor GDP showing in the first half). China faces ongoing structural headwinds, but its immediate covid-related constraints have been eased, and it enjoys the rare luxury of a low inflation rate, allowing its authorities to follow a more lenient monetary policy.

So, talk of “stagflation” again seems premature to us. That said, the geopolitical climate remains troubling, and not just on account of the trauma in Ukraine. The West has been reminded that China’s claim on Taiwan is not negotiable (though that does not mean that it is imminently actionable either).

We had already reduced our equity weightings in the New Year as it became clear that central banks were indeed planning (rather belatedly) to start normalising monetary conditions that had become needlessly lax. We reduced them further on news of the invasion.

However, our equity holdings returned to neutral only: we still see corporate profitability staying healthy, and valuations, while stretched, are not outlandish. And the funds released have been held as liquid assets. Cash may not offer positive real returns, but it is more stable than securities.

We retain a long-standing underweight in bonds. With some government yields in the US now offering positive real yields to maturity, we have begun to reduce our longstanding underweight in bonds there. In Europe, however, most bonds still seem unlikely – despite recent yield increases – to deliver inflation-beating returns even on a long-term view.