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The View - asset allocation update

5 months ago

Jaime Arguello, Chief Investment Officer

Jaime Arguello
Chief Investment Officer

Macroeconomic backdrop

Recession fears mounted for the US and European economies, whereas China rebounded following easing of Covid lockdowns. Central bank policy showed a marked West/East split, as the US and Europe flagged increasingly aggressive interest rate hikes to address inflation, while China and Japan remained resolutely accommodative. Russian action to squeeze Europe’s gas supply brought higher prices for gas, while the Brent oil price fell back towards $100 per barrel on the prospect of lower demand.

Market update

Equity markets were hit hard by recession fears in most cases, although China outperformed strongly on hopes of an economic rebound and a relaxing of last year’s regulatory clampdowns. Government bonds rallied sharply, as confidence in planned rate hikes faded. The US 10Y Treasury bond yield fell back towards 2.8%, moving in the opposite direction to the bond price. The German Bund yield also tumbled, while peripheral bonds took heart from the European Central Bank plan to prevent ‘fragmentation’ of the eurozone bond markets.

Architas view

Architas view

We have become more defensive on equities this month, as it has become clear that inflation is not yet close to its peak. As central banks focus on inflation, the probability of a hard landing or recession has increased. Within equities, we maintain our preference for US/Asia Pacific. Our positive stance on Chinese equities has worked well and we maintain that view. We have become more negative on European equities, however, as the war in Ukraine is likely to weigh heavily on growth.

This month we have become more positive on European as well as other government bonds, believing the sharp rise in yields, and fall in prices, is behind us. As the possibility of a recession grows, government bonds are likely to see better support given their traditional safe haven status.

Given the weaker outlook for riskier asset classes, we have become less positive on high yield bonds. Whilst the yield on the asset class is now at a very attractive level, the risk of further weakness will continue to grow as the economic backdrop deteriorates.

Elsewhere we remain positive on cash and alternatives, valuing their diversification potential.

Look out for further updates as the situation evolves.

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