Trimming risk...Still positive on the outlook


On 24 January, we recommended trimming some equity risk in portfolios. While we believe the economic outlook remains very positive, events over our summer, including the acceleration of central bank action, more persistent inflation, and heightened geo-political risk, suggest our unchanged preference for equity over fixed income returns should be outworked from a more neutral position.

  • We remain constructive on the macro-economic outlook, and we are arguably more comfortable now than we were when we published our outlook in early December that 2022 growth will be above trend. Omicron cases now look to be peaking, mobility restrictions have been modest and are now expected to ease through Q1, while the impact on economic activity has been limited. We also have a clearer view of central banks, which have lost patience with elevated inflation and decided to begin removing liquidity much sooner than they initially flagged.
  • Other drivers of a strong 2022 growth outlook remain intact from global consumers flush with cash; pent-up demand for consumer services; cycle-low inventories, likely underpinning a production upswing; and capex intentions globally at their highest level for years. Relatively, the outlook appears strongest across Europe and Australia, the UK and then the US. China appears to be a game of two halves, with H1 2022 likely to remain weak before the recent easing in policy fosters stronger H2 2022 growth.
  • Near-term uncertainty warrants a more neutral risk stance. Despite our positive macro outlook, a number of additional cautionary factors have played into our decision to trim risk. Included is that, historically, the months preceding the first rate hike in a cycle have typically led to volatility. Additionally, there is unlikely to be any meaningful disinflation until March data is released in mid-April, and geo-political tensions have risen, providing additional risks for markets to absorb.
  • We anticipate embracing a more risk-on position in the period ahead as our macro views of strong growth and easing inflation become more evident and after markets have digested the first steps towards higher rates. While we typically target 6-12 months for our tactical positioning, our latest positioning likely reflects a stance closer to 3-6 months.