Despite sell-off, stocks remain vulnerable to further weakness. Earnings expectations have held up reasonably well thus far, but could face considerable pressure from rising input costs and slowing economic growth.
Tighter global central bank policies and still elevated inflation could keep upward pressure on yields, although U.S. rates appear to have peaked for now. Credit spreads look more attractive following risk-off sentiment.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
Equity Regions
Growth orientation and narrow leadership of the U.S. market makes it more susceptible to rising rates. However, lower representation of more cyclical sectors could be beneficial if recession concerns increase further.
Less challenging valuations and a procyclical sector profile could be supportive if growth outlook stabilizes. However, a protracted conflict between Russia and Ukraine will continue to weigh on growth outlook and supply chain improvement.
Valuations are attractive, but the Russia-Ukraine conflict poses a significant risk, due to rising energy costs and the impact of financial sanctions. The path for ECB support remains uncertain over the coming months.
Yen weakness and cyclical orientation have been significant headwinds to performance. Attractive valuations, supportive monetary policy and improving corporate governance should provide long-term tailwinds.
Valuations are attractive. COVID lockdowns remain a near-term headwind in China; however, the medium-term outlook appears more attractive due to prospects for more significant policy support.
Style & Market Capitalization
Relative valuations for value stocks remain attractive, but the gap has narrowed and the cyclical outlook has weakened. Growth stocks’ stay-at-home tailwind continues to fade, and valuations continue to be pressured by higher rates.
Value stocks remain attractive but are facing weaker cyclical tailwinds and heightened geopolitical risks. Meanwhile, growth stocks face higher relative valuations and more pressure from potentially higher rates.
Small-cap stocks offer attractive relative valuations and still strong earnings growth. However, elevated input costs, wage pressures and heightened market volatility could challenge performance. Higher-quality bias is warranted.
Small-caps balance idiosyncratic opportunities with moderating global growth. Additionally, caution is warranted due to U.S. dollar strength and a potential flight to quality that could favor large-caps.
Inflation-Sensitive
Commodity prices are elevated, but supply shortages are likely to endure over the near to medium term. Commodities can offer an attractive hedge to a sustained period of elevated inflation.
* For decisions between style or market capitalization pairs, boxes represent positioning in the first asset class relative to the second asset class.
The asset classes across the equity and fixed income markets shown are represented in our multi-asset portfolios. Certain style and market capitalization asset classes are represented as pairwise decisions as part of our tactical asset allocation framework.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
Direction of rates from here dependent on further Fed tightening in the face of moderating growth, potentially peaking inflation and impacts of geopolitical conflict. Wider spreads are reflecting risk-off sentiment.
Central banks, such as the ECB, are expected to turn more aggressive, which could pressure rates higher. The U.S. dollar remains supported by the Fed’s tightening and safe-haven trade.
Longer rates appear to have peaked as Fed tightening is already priced in. The sector provides portfolio ballast in a risk-off scenario, but remains vulnerable should elevated inflation persist.
Although inflation may be peaking, the sector should offer a hedge if commodities continue to be pressured higher as supply chain issues persist and Fed tightening fails to bring inflation down.
Credit fundamentals remain strong, default risk remains low and wider spreads following risk-off sentiment are supportive. However, spread volatility is expected to continue due to geopolitical, inflationary and growth concerns.
Relative valuation is less attractive, but solid fundamentals and demand for yield should provide tailwinds. Shorter-duration profile and rate resets could be less beneficial as Fed tightening appears to be priced in.
EM valuations look attractive and are supported by moderating Fed expectations and stronger trade activity. However, geopolitical tensions, lingering coronavirus concerns, and fiscal pressures remain risks.
EM yields are at attractive levels and the currencies are cheap although vulnerable to U.S. rates, while Fed tightening and flight to safety keep upward pressure on the U.S. dollar.
This material is provided for informational purposes only and is not intended to be investment advice or a recommendation to take any particular investment action.
