You are using an outdated browser. Please upgrade your browser to improve your experience.
Article | 14 November 2022 | Investments
Jaime Arguello
Chief Investment Officer
Western central banks crept closer to a pivot point, led by the ECB which hinted that ‘substantial progress’ on inflation has been made. Meanwhile eurozone inflation touched another record high at 10.7%. European gas prices then tumbled below €100/ KWh, against the all-time high of €300/ KWh reached in August. The US Federal Reserve announced its fourth successive 75bps rate hike and indicated that, while the pace of hikes might slow, interest rates could stay higher for longer. The Bank of England also raised rates by 75bps, after UK financial markets were calmed by the appointment of Rishi Sunak as prime minister. The price of oil traded higher, despite the scheduled release of 15 million barrels from the US Strategic Petroleum Reserve.
Equity markets enjoyed something of an autumn rally, in spite of aggressive sell offs in the US tech sector, where revenue growth forecasts were adjusted downwards. Government bond yields slipped back, as prices fell, then rose again as the market debated the timing of a central bank pivot. Yields then tumbled once again, as US October inflation marked a positive surprise. The US dollar paused for breath after this year’s significant strength, which had forced the Bank of Japan to spend $43bn on defending the yen in October alone.
Architas view
Markets have recently enjoyed a more benign period, as hopes have grown for less hawkish monetary policy. However, we believe the Fed will be resolute in its interest rate tightening approach, aiming to bring inflation under control. Interest rates will need to remain higher for longer until inflation moves below target, something not expected to happen until late 2024.
Given this context, it is hard to be anything but cautious on bonds, although we have become more positive on the outlook for investment grade corporate bonds. Given the most recent inflation print in the US, which showed inflation slowing more than expected, we sense we may experience a more stable period for bond yields in the near term and we are comfortable in taking some additional risk via this asset class.
We maintain our cautious stance on equities. Despite growing signs that inflation could be moderating, the path toward looser monetary policy remains long and arduous, which is likely to weigh on economic activity in the meanwhile. We maintain our preference for US and Asia Pacific relative to European equities. In terms of portfolio construction, we continue to advocate a style neutral approach, while always favouring a more defensive stance.
We remain positive on cash, although we would prefer to seek more attractive returns from lower risk sectors, such as short-dated investment grade and high yield corporate bonds.
