Times are tumultuous. Are you wondering how to invest in quarter 2 of 2022 – we’ve got you covered
Given the near-term uncertainties surrounding global growth, we have reduced our exposure to both credit and stocks. Given the potential of a European recession, investment managers are especially cautious with European equities and the euro.
Given the diversification possibilities and potential support for commodities exporters, we have a more optimistic outlook for emerging market equities, especially China, and Asia Pacific stocks excluding Japan, as well as some EM FX. Finally, we are long USD because we believe that interest rate differentials will support the dollar as the Fed stays focused on inflation, and that its defensive features will provide protection if conditions deteriorate.
Given the mounting geopolitical and stagflation concerns, we believe focusing on high-quality firms rather than sectors is the best approach. Companies with great pricing power and the capacity to safeguard profits should fare well in this climate. Equities should continue to provide a reliable source of income now that the worst of the epidemic has passed.
We are apprehensive about Europe due to the danger of a recession, but we see opportunities to diversify in several emerging economies, particularly those benefiting from the commodity price boom. Parts of China appear to be inexpensive, but volatility is strong and tail risks have become fatter.
A Steady Income
Stagflation is a concern, but we believe there are some categories of fixed income that will be better shielded from increasing rates and slower growth. On the assumption that inflation expectations grow, break evens should continue to do quite well, and we are also bullish on euro investment grade (IG) because to its more defensive attributes and improved prices.
Duration should not be a concern for fixed income investors. The rise in nominal rates will very certainly be limited by debt refinancing limits, central bank policies, and demand for safe haven assets. We believe that ECB rate rises are unlikely in 2022 (despite the ECB’s hawkish tone in March), and so find value in core European duration. We are increasingly wary of China. The housing market remains a source of concern, and we anticipate further volatility in the near future.
The Private Market
So far, the immediate impact of the conflict on our portfolios has been minimal, with the markets’ resilience resulting in few significant price fluctuations. Nonetheless, the war’s wide-ranging and frequently indirect supply chain disruptions make this a period for cautious active investment and credit selection.
Because of the variable rate coupons, private credit can be an effective inflation hedge. It also provides a senior position in the capital structure as well as substantial income with minimal volatility.
Our current concentration is on firms that can sustain more cashflow and margin pressure.
Right present, the primary risk to real estate is weaker economic growth. We feel markets have been reluctant to respond to the situation, therefore we are proceeding with prudence. We are closely monitoring our existing tenant base for signs of heightened risk, and we are carefully screening any new renters.
Stagflation is also a source of concern. Real estate often performs well during brief times of inflation but poorly during extended periods of stagflation. Nonetheless, we continue to keep our focus on long-term macro topics such as healthcare, residential buildings, and data centers, while inflation-linked leases provide some inflation protection.
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