Mosaique Views: Markets in perspective

 october / november 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.

Recently, those concerns have nonetheless become a little more pressing. Inflation and interest rates still have yet to peak, and growth is slowing.

The severity of the downturn remains 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 continue to point to a gradual slowdown, and governments are acting further to protect poorer households from the worst of the energy squeeze.

Elsewhere, the important US economy is less exposed, and still 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 has the rare luxury of a low inflation rate, allowing its authorities to follow a more lenient monetary policy.

So, talk of “stagflation” still looks premature to us. That said, the geopolitical climate remains troubling, and not just on account of the ongoing 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. In each case we chose to keep the funds in liquid form – this might look unusual at a time of inflation, but in the short-term cash is more stable even in real terms than are securities, and it would allow us to capitalize on opportunities as they arose.


Our equity holdings returned to neutral only. Valuations have now fallen significantly, and we still see corporate profitability staying healthy, but interest rate and earnings risk remain elevated, and we remain neutral.

We have however used some of the extra liquidity to add to our bond holdings. Bond valuations have arguably improved by more than equities’ as the increase in yields has recently accelerated, and we have been tactically underweight bonds since Mosaique’s launch. We recently trimmed the underweight in US portfolios and are now doing the same in European portfolios to reflect those improved valuations. We have not yet closed underweight positions completely because yields are not yet at levels that we think can convincingly deliver positive real returns.

Needless to say, we are following bond and equity markets’ gyrations carefully.