Skip navigation Scroll to top
Scroll to top

LGT Private Banking Europe House View – June 2022

June 1, 2022

The tightening of financing conditions is likely to cause global economic growth to cool. The big question therefore remains whether central banks will manage the delicate balancing act without triggering a recession. We are adjusting our sector allocation and realize gains in non-cyclical consumer goods and utilities. As the market environment is again opening up more potential for investment-grade corporate bonds, we upgrade the segment to "neutral".

LGT Private Banking Europe House View

The first five months of 2022 could hardly have been more difficult for investors. Not only were there considerable headwinds for equities, but also for bonds, the second major investment category. At the turn of the year, the focus was still on inflation, but in February, the start of the war in Ukraine added another problem for capital markets that is very difficult to assess. As a result, justified concerns emerge that global economic growth could cool off in the second half of the year. Thus, growth in China is likely to slow due to the zero-covid strategy. In addition, we expect economic momentum in the US to weaken compared to the beginning of the year, as the Federal Reserve (Fed) is currently focusing strictly on fighting inflation. Although losses in individual market segments have been enormous since the start of the year, most broad-based equity indices trade still clearly higher than before the corona pandemic, including the MSCI World, the S&P 500 and the Europe STOXX 600.

US financing conditions are tightening

In recent weeks and months, the Fed has repeatedly emphasized that financing conditions are too loose and should rise again to acceptable long-term levels. The conditions are influenced by several factors, including central bank rates, the long end of the yield curve, equity markets, credit spreads and currencies. Earlier this year, the corresponding index pulled away from its fifty-year low and is now moving upward. All factors have contributed to the rise, with the stock market setback being the largest contributor. The correction in the markets has thus helped the Fed to normalize financing conditions. Despite the steep rise, we are still well below the historical average.

Inflation – we are not out of the woods yet

For investors, inflation expectations are generally more important than the realized inflation. Inflation expectations in the United States are starting to weaken. However, five-year expectations are still close to 3%. Therefore, in our view, we are not out of the woods yet. Wage pressure and price pressure due to expensive rents are currently too high in the US. Both components could remain at a higher level for longer than was expected at the beginning of the year. Therefore, the probability has increased in recent weeks that high inflation is stickier than reflected in current market prices, in our view.

Defensive positioning

Capital markets continue to be characterized by an unusual mix of growth and inflation. In an environment where central banks are almost forced to address classic supply shocks – such as disrupted supply chains –, visibility is limited and volatility elevated. Economic growth will begin to weaken as financing conditions tighten. The big question remains whether central banks will be able to manage this balancing act without triggering a recession. The war in Ukraine is another hard-to-define wild card, especially for the European Central Bank (ECB).

Investment strategy

At the investment strategy level, we are sticking to our defensive positioning across all asset classes. Alternative investments are our preferred asset class, followed by equities, liquidity and bonds. Selection remains the number one success factor in every asset class. We expect volatility, which is high by historical standards, to be a constant companion in the coming months. This is due to the limited visibility in the macroeconomic area and the associated lower predictability.

Equity strategy

We maintain our neutral positioning for equities. However, we are adjusting our sector allocation as there have been huge performance divergences this year. In the two defensive sectors non-cyclical consumer goods and utilities we realize the outperformance and reduce the rating from “attractive” to “neutral”. In addition, we raise the technology sector from “unattractive” to “neutral” due to the expected de-rating of the sector in recent months. In order to maintain a defensive bias, we increase the weighting for the healthcare sector from “neutral” to “attractive”. Valuations for this sector are cheap by historical standards and thus have upside potential.

Fixed income strategy

We see further upward pressure in government bonds of developed countries based on our inflation expectations. Therefore, we maintain our “unattractive” rating and tend to be short on duration. On the other hand, we raise our rating for corporate bonds from “unattractive” to “neutral” as rising interest rates and higher credit risk premiums are creating more potential again. Within fixed income, we continue to see the best risk-return potential in hybrid investments.

Alternative investments

We keep our positioning unchanged and consider alternative investments to be “attractive”. In the current environment, gold remains our favorite. Despite recent advances, we continue to see potential in the commodities sector in the medium- to long-term.

LGT helps you make informed investment decisions

All about global economic and market trends at a glance

Subscribe to LGT's research newsletters

You can also follow us on Facebook or LinkedIn – or visit MAG/NET and discover interesting background articles. If you have questions, a consultant from the bank will be happy to help you.

Imprint
Publisher: LGT Bank (Switzerland) Ltd., Glärnischstrasse 36, CH-8027 Zurich
Author: Thomas Wille, Chief Investment Officer, Email: thomas.wille@lgt.com
Editor: Alessandro Fezzi, E-Mail: alessandro.fezzi@lgt.com
Source: LGT Bank (Switzerland) Ltd.

Risk Disclosure (Disclaimer)
This publication is an advertising material / marketing communication. This publication is for your information only and is not intended as an offer, solicitation of an offer, or public advertisement to buy or sell any investment or other specific product. Its content has been prepared by our staff and is based on sources of information we consider to be reliable. However, we cannot provide any confirmation or guarantee as to its being correct, complete and up to date. The circumstances and principles to which the information contained in this publication relates may change at any time. Information that has been published should therefore not be understood as implying that no change has taken place since its publication or that it is still up to date. The information in this publication does not constitute an aid for decision-making in relation to financial, legal, tax-related or other consulting matters, nor should any investment decisions or other decisions be made on the basis of this information alone. It is recommended that advice be obtained from a qualified expert. Investors should be aware that the value of investments can fall as well as rise. Positive performance in the past is therefore no guarantee of positive performance in the future. Investments in foreign currencies are also subject to fluctuations in exchange rates. We disclaim all liability for any loss or damage of any kind, whether direct, indirect or consequential, which may be incurred through the use of this publication. This publication is not intended for persons subject to legislation that prohibits its distribution or makes its distribution contingent upon an approval. Any person coming into possession of this publication shall therefore be obliged to find out about any restrictions that may apply and to comply with them. In line with internal guidelines, persons responsible for compiling this report are free to buy hold and sell the securities referred to in this report.