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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:
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:
Growth companies benefiting from swift digitalization
Sustainable companies tackling climate change risks
Innovators in the renewables and electrification spaces
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:
Commodities such as oil, gas, metals, and agricultural products
Inflation-linked government bonds and real estate
Dynamic fixed income and macro investing strategies
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:
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.
Quality, "all-weather" companies with stable earnings
Dynamic fixed income and macro investing strategies
Total return investing strategies
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.
Active management to complement passive exposures
Flexible or unconstrained investment approaches
Total return investing strategies
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.
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