Investing in the second half and beyond: It’s a whole new ballgame

After a painful (and largely unexpected) first half of 2022, what lies ahead? Multi-Asset Strategist Nick Samouilhan and Investment Director Andrew Sharp-Paul offer their perspectives on the second half outlook and some actionable takeaways, respectively.

It’s fair to say that, from an investment perspective, 2022 has not turned out the way most investors expected six months ago. After two-plus years of pandemic-induced lockdowns and uncertainty, the year began with optimism that the world was finally going to move “beyond COVID.” With high pent-up consumer demand, low goods inventories that needed rebuilding, and general economic buoyancy in the air, there was widespread confidence that growth this year would be strong and resilient. 

But the thorny problem of rapidly rising inflation meant that 2022 was also going to be about policy “normalization” — global central banks raising interest rates, after years of extremely loose monetary policy, to combat inflation. However, markets initially seemed to believe that central banks could effectively address inflation without significantly denting economic growth. Ideally, such a scenario would have delivered a year of soaring equity markets, robust growth, and rising bond yields. Needless to say, that hasn’t entirely played out so far this year.

Looking ahead, we believe the global macro and market landscape is likely to be dominated by four high-level themes:  

1. A changed world: What a difference two years make

As the world hopefully gets past COVID-19, it will not be returning to the same one we left behind in early 2020: COVID has spawned, fast-tracked, and occasionally obscured many fundamental structural transformations to the global economy and markets that are now beginning to have material impacts. For example:

• Many growth-oriented companies will benefit from the worldwide acceleration in digitalization spurred on by COVID over the past two years. This inexorable march toward a more digital future is likely to continue apace in many key areas of the global economy — enterprise, finance, health care, education, and automation — with bouts of market volatility providing potential opportunities to invest in the long-term “winners.” 
• In addition, the global decarbonization transition and increased focus on the threats posed by climate change also gained traction as COVID tested the resilience of our planet. This has shone a favorable spotlight on companies that are prioritizing sustainability and doing their part to help the world mitigate or adapt to the multigenerational challenges associated with climate risk. 
• Nearer term, fallout from the ongoing Russia/Ukraine conflict has shifted many world governments’ attention toward energy security, including weaknesses in global fossil-fuel supplies, which should confer further growth tailwinds to innovative companies within the renewables and electrification industries.

2. Inflation: Is the new bogeyman here to stay?

The global inflation outlook is front and center for many investors, but complicated and far from clear as of this writing. For starters, inflation readings have now been higher for much longer than many observers (including the Fed and other central banks) could have foreseen, making future inflation forecasts tricky at best. That being said, we do have a view on the issue.

While we see plausible reasons to believe global inflation may peak in the near term, we would also caution investors to prepare for the distinct possibility that inflation may have staying power. Indeed, it may have become an enduring feature, not merely a temporary “oddity,” of the macroeconomic setting. With that in mind, from an investment standpoint:

• Investments in commodities and other assets that can potentially act as an inflation hedge, such as property or inflation-linked government bonds, may be helpful inflation-fighting additions to a portfolio.
• Persistently high inflation could also help usher in a more volatile macro environment, with interest rates and currencies behaving more erratically than in the past, opening up greater opportunities for dynamic fixed income and macro investing strategies.

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3. Growth forecast: Cloudy with a chance of recession

The current consensus outlook for economic growth is that there really is no consensus. At worst, stubbornly high inflation and other headwinds could push the global economy (and many national economies) into recession later this year or in 2023. While recession is not our base case, the probability has risen to the point that it cannot be ignored. At best, we believe a marked global slowdown that stops short of a full-on recession is likely to take hold. The culprit for this less-than-upbeat outlook is twofold:

• Rising interest rates are already weighing on some interest-rate sensitive areas of the global economy, such as consumer spending, the booming housing market, and business investment.
• Elevated inflation, especially lofty energy costs, is dampening consumer sentiment and spending, forcing many households to rebudget accordingly, while wage increases are battling to keep pace. 

This world of higher inflation and interest rates, with slower growth to boot, will ultimately expose which companies are well run and equipped to weather such a “storm,” versus more vulnerable companies whose businesses have become dependent on strong growth and cheap funding. That’s why, for investors, it’s critical to choose active investment managers with expertise in individual stock selection.

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4. Market volatility: Think of it as a friend, not a foe

The murky outlook for global inflation, interest rates, and economic conditions has led to an unwelcome uptick in market volatility across multiple asset classes. And the volatility may be amplified going forward by several broad structural changes, as markets feel the pinch of the “easy money” era coming to an end, along with a multiyear deglobalization trend, aging demographics (particularly in Europe, Japan, and China), and government responses to income inequality. Against this backdrop, periodic market gyrations are all but inevitable, in our view.

For investors seeking solutions, we believe there will likely be (and should be) renewed value placed on actively managed investment strategies that can filter out the “noise,” identify attractive opportunities, and complement passive index or ETF exposures. Investors might also consider flexible or unconstrained approaches that can aim to capitalize on market volatility.

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For the average investor, today’s markets may seem very uncertain and even hazardous at times, but it’s important to remember that there are always investment opportunities to be found. You just have to know where to look, partner with an asset manager you can trust, and arm yourself with the proper portfolio tools.