Overview
The team made no changes to our core positioning this week. We still have a cautious stance on risk assets from our underweight ratings for equities and credit. Central banks, especially the Federal Reserve, remain focused on bringing inflation down. Successfully doing so will involve hiking enough to reduce demand, which we expect will result in further equity weakness.
Volatility in bond markets is still high - the market continued to sell off last week - and we are reviewing our flat positioning here, looking for where there is more clarity on central bank decisions and market pricing.
In equity sectors, we have a positive outlook for healthcare, financials, and industrials. Healthcare should benefit from inflation-linked pricing, relatively cheap valuations, and positive technical indicators. Financials are also trading at attractive valuations, while the sector should receive a boost from higher official interest rates. Industrials, meanwhile, tend to underperform when growth slows but could be further supported by ongoing reopening of economies and the easing of supply chain disruptions in certain industries.
We have a negative outlook for utilities, communication services and consumer discretionary. Earnings momentum for regulated utilities has weakened compared to the broad market. Communication services tend to underperform in a rising interest rate environment and the sector faces regulatory headwinds.
Lastly, the consumer discretionary sector is expensive versus its history and the outlook is weak given there are signs of overconsumption from consumers bringing purchases forward in the last year. Rising input costs and slower demand will continue to weigh on consumer sectors. Recent consumer sentiment data paints a very negative picture and we are reviewing our neutral view of consumer staples.
We expect the economic outlook for Europe to worsen as the fallout from the war takes its toll, despite last week’s relatively strong PMI data. Expectations for the future captured in survey data are very weak and we do not share European Central Bank chief Christine Lagarde’s confidence that Europe can post positive growth even if gas flows from Russia are disrupted.
What we are watching
Gas flows from Russia to Europe; further indications from the Fed of a possible 50bps hike in May; and data including China PMIs, US consumer data, and US non-farm payrolls.
