• Stubbornly high inflation. The Fed is cornered between fighting inflation and sustaining economic growth. Markets price 9 rate hikes in 2022. This is happening at a time when economic growth is softening. A policy mistake can very well represent a black swan event. Historical precedents such as the 1970s provide some guidance.
• Credit spreads to widen a whole lot more. The cocktail of softening economic growth and rising long-term interest rates is a clear headwind for credit markets. Credit spreads have widened but are still more than distance away from offering compelling “value” given the macro headwinds. 2018 could be a conservative proxy, however a 2008 like credit spreads widening scenario is not out of the question, especially for high yield. Emerging markets credit is the only area left providing real value, especially after the weakness in China driven by the property sector.
• The USD rally has run its course. Structurally, the environment is increasingly more bearish for the U.S. Dollar. While a consolidation around 1.08-1.10 may take some time, our medium-term target of 1.18 suggests the risk-reward is more skewed to being long the Euro. However, we are mindful of tail risks in the Euro associated with the French Presidential election over the next couple of weeks.
• Downgrading Equities to Very Bearish. We have been more cautious on equities since Q3 2021. A stagflation environment has historically been a challenge for equities, especially when trading close to record high valuations. We remain positive on certain pockets of equity markets such as value, Emerging Markets and de-rated mid-cap growth stocks geared to the new green economy. That said, we keep a relatively low exposure to equities relative to benchmarks and history.
• The Commodities super-cycle remains intact. Commodities managed exceptional outperformance in Q1 2022 despite a rising USD. As the USD enters a potential weakening phase, we strongly believe the Commodities bull market will carry on. Our over-arching positive view on inflation makes us structurally positive on precious metals. We believe the environment is ripe for a renewed outperformance of gold and silver. We do turn more neutral on the energy commodity complex as prospects of demand destructions may balance some of the medium-term supply constrain.

Documents annexes

MAM-Investment-Outlook-2022.Q2.pdf