Valuations are starting to turn favorable again, although they are not cheap enough to encourage investors to ignore fundamentals.
Macro: Central banks will not tip major economies into recession this year as they seek to control inflation, which appears to have peaked.
The risk of a true recession for 2022, although increasing, is overstated. The savings surplus of US households stands at 2.3 trillion dollars, or about 12% of their income, and the strength of the job market should be enough to offset the pressure exerted on consumers. But… construction activity is down about 30%, and surveys suggest more is to be expected.
Obligations: US Treasuries look particularly attractive. The Fed is 60-65% into its tightening cycle. US core inflation appears to have peaked, helped by the rising US dollar, while market expectations for interest rates appear to be excessive (they expect the fed funds rate to peak near 3.5 %, while we expect 3%). We are overweight US Treasuries. Due to widening spreads and large drawdowns, US high yield and European quality credit are also starting to look attractive. The outlook for European sovereign debt looks weak by comparison, with the ECB needing to catch up with deteriorating inflation dynamics.
Actions: Japanese equities should benefit from better economic momentum, lower inflation risk and more optimistic consumers than elsewhere; the heavy losses recorded this year make the yen extremely cheap. Despite the recent rally, Chinese equities appear to be enjoying an attractive valuation thanks to the reopening of markets and a supportive policy package. We are overweight Chinese and Japanese equities. We are underweight Eurozone equities on concerns about the economy, particularly the risks of side effects related to energy supply.