Investment View Q4-2022 ǀ Waiting for ...pivot
- The fast-track monetary tightening and the EU energy crisis are powerful headwinds for the global economy: recession forces are set to grow over the turn of the year.
- The depth of the EA recession will partly depend on winter temperatures. Europe’s large negative terms of trade shock is already damaging its competitive position and may persist for years.
- Tails risks are unusually fat. The Fed’s pivot and eventual opening of the diplomatic route in Ukraine are great bullish triggers, but unlikely in the near term.
- We are still focused on the downside for now, as risk assets fail to price enough bad news. Investor positioning is arguably defensive, but equity funds glob-ally have still seen inflows this year. Worryingly, we see cracks in the global financial plumbing, in part sourced in a shortage of safe collateral and extreme policy uncertainty.
- High inflation will mostly prevent central banks to act as a credible lender of last resort in this difficult economic and financial environment. The attack on UK markets epitomises the limited policy room and contradictions.
- We retain our defensive portfolio positioning for now, with a long cash position, and shorts in equities and High Yield. We keep a small duration position for now but see limited upside for risk-free yields from here. Treasuries are a better haven than Bunds. We find IG credit relatively cheap and offering attractive carry.