The first half of 2022 has drawn to a close with both equities and fixed income posting big losses. The US stocks have had the worst start to the year in over 50 years. With bond markets having had the worst start to the year since records began. Uncertainty is the name of the game, and price action continues to be unpredictable.
The main concern is that slowing growth and recession fears are set to overtake inflation.
The Fed is suggesting that it could swing the hammer and get scalpel-like results. Therefore, our baseline case for the next 12 months is that the Fed is committed to reducing inflation, while bringing growth down to recessionary levels.
If we transition to a recessionary environment, the market impact would be profound. Risk-on and risk-off assets would start to behave differently, as opposed to what has happened this year to date: regardless of risk exposure, all long-term assets are down between 10% to 30%.
Government bonds (and Investment Grade Corporate paper) have responded quickly to the shift from a more aggressive Fed, therefore a stabilisation should be in store. Leveraged, high-yield names could correct further to account for the fact that a rise in corporate defaults is likely.
The equity sell-off has largely been driven by an earnings multiple1 -contraction rather than a deterioration in earnings expectations. The average US company, at current valuations, is still vulnerable to recession-induced lower earnings.
Overall, this transition would be beneficial to our investment stance:
Markets will begin to differentiate between good and bad credit, resilient and not so resilient earning streams.
“Safe havens”/risk-off assets (like US treasuries, low-duration high quality credits, and gold) should start decoupling later this year. If this is the case, we can transfer money from risky assets into areas that will complement (rather than add to) the remaining risk on the table.
To read the full AndPapers Q3 2022 click here
The value of investments and any income from them can fall as well as rise and neither is guaranteed. Investors may not get back the capital they invested. Past performance is not indicative of future performance. The material is provided for informational purposes only. No news or research item is a personal recommendation to trade. Nothing contained herein constitutes investment, legal, tax or other advice. This document does not represent primary research; it provides the views of the London & Capital investment team examining the fundamental background, economic outlook and possible effect on asset markets. This document is not an invitation to subscribe, nor is it to be solely relied on in making an investment or other decision. The views expressed herein are those at the time of publication and are subject to change. Correct at time of going to press. © London and Capital Asset Management Limited. All rights reserved.
Copyright © London and Capital Asset Management Limited. London and Capital Asset Management Limited is authorised and regulated by the Financial Conduct Authority of 12 Endeavour Square, London E20 1JN, with firm reference number 143286. Registered in England and Wales, Company Number 02112588. London and Capital Wealth Advisers Limited is authorised and regulated by both by the Financial Conduct Authority of 12 Endeavour Square, London E20 1JN, with firm reference number 120776 and the U.S. Securities and Exchange Commission of 100 F Street, NE Washington, DC 20549, with firm reference number 801-63787. Registered in England and Wales, Company Number 02080604. London and Capital Wealth Management Europe A.V., S.A. registered with the Commercial Registry of Barcelona at Volume 48048, Sheet 215, Page B-570650 and with Tax Identification Number (NIF) A16860488, authorised and supervised by the Comisión Nacional del Mercado de Valores (“CNMV”), and registered at CNMV’s register under number 307 (https://www.cnmv.es/portal/home.aspx).
To receive more related content subscribe here.