In short:
· A clearer outlook for the bond market is helping risk assets
· Will the China reopening fuel a global economic rebound?
· Our emerging market equity underweight has been closed
As the new year begins, it is time to take stock of recent developments and look forward to what the year might bring. The past year has been far more eventful than any of us could have imagined at the end of 2021. It started with Russia’s invasion of Ukraine. Inflation rose to levels that were higher than anticipated. Central banks raised rates far more rapidly than anyone expected. Bond markets suffered their worst performance in since the 19th century.
This question keeps being asked by the media and asset managers. In the past year, the asset manager of one major US bank published a note asserting that “China is still investable”, while the investment banking arm of the same bank asserted that China is not. One large ETF provider helpfully created an “emerging markets ex-China” ETF to cater to investors who do not believe China is investible. Banks and asset managers tend to answer this question differently depending on the extent to which they are invested in the Chinese market.
Over the past few months, we had been expecting the major economies to head into a recession. We also expected that the impact of shocks to the global economy, including supply chain disruptions and Russia’s invasion of Ukraine, would begin to dissipate. Consequently, we expected inflationary pressures to begin receding.
In short:
· Central bankers reaffirm their hawkish intentions
· The global economy comes under pressure from a record energy shock
· Sentiment fades as growth prospects worsen
Markets are being driven by two interrelated risks. The first is inflation, and its implications for consumers and producers. The second is the risk of a recession – specifically whether the Fed can succeed in squashing inflationary pressures without triggering a recession.
In short:
· Treasury bonds gain favour from investors as growth concerns rise
· The 60:40 portfolio had one of the worst quarters on record
The war in Ukraine continues, with little visibility on its likely duration and outcome. Economic policy uncertainties have started to decline, while uncertainty regarding economic outcomes has increased. It is now clear that sanctions imposed on Russia are unlikely to be reversed for the foreseeable future. Similarly, the damage to infrastructure in Ukraine makes it unlikely that the country’s export industries can resume operations even if the war were to end tomorrow.
