Ready turbulence
04 February 2022
Newsletter by the Private Wealth Management Team
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Evidence of diverging economies and policies is becoming more apparent. Our four “Ds” concept in our 2022 outlook is materializing as global growth, and inflation data reveal more significant disparities and dispersion in economic performance and outlook. We believe this will continue but not derail growth. We remain constructive but urge some caution and greater care is needed in selecting investment strategies given the divisions, divergence, disruptions, and the large piles of debt weighing on economies across all regions.
While there is a growing risk of a faster move towards monetary policy normalization, we believe that the journey towards policy normalization may create market turbulence. As monetary policymakers confront inflation and inflation uncertainty, business and consumers behavior can be impacted. Higher inflation tends to also bring with it higher uncertainty out the inflation outlook. This in turn can trigger greater general business uncertainty and higher pressure on officials to address this apparent problem. We expect monetary policy will begin to move towards some new normal. However, this process we expect will be very slow, gradual, and not as aggressive as currently priced by markets. Thus, there is likely to be considerable market turbulence and performance dispersion across markets.
Relative to last month, we now see greater risks in both geopolitics and the global economy, including policy error by central bankers and/or political leaders. While risks are greater, we continue to believe the risks remain manageable.
Portfolio strategy
The US remains our favorite region and where we are holding a holding overweight allocation to assets that benefit from inflation uncertainty and higher inflation. In fixed income, this includes an overweight allocation to TIPS, an allocation we have had in place since Q3 2021. In equities, we continue to favor an allocation to beneficiaries of both slowing growth and higher inflation.
Our overweight allocations include a combination of cyclical sectors such as financials, materials as well as consumer staples. Our style factor bias remains the same, we favor quality, value, and large-cap. In the EU and Europe, in general, we have a diversified allocation given the region is facing several headwinds including inflation risks and greater geopolitical stress.
We maintain our overweight to gold given the higher degree of geopolitical stress and growing concerns around inflation and inflation uncertainty. Times ahead will be challenging; market turbulence will be commonplace as most major central banks embark on reducing monetary policy as headwinds from the pandemic fade.
See our asset class views.
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