Michael Strobaek, Credit Suisse
Since the beginning of 2022, both equity and bond markets have been under selling pressure from a basket of factors, including the Russia-Ukraine war, US-China tension, economic slowdown, soaring inflation and tightening monetary policy.
What’s worse is that central banks have reinstated their determination to tighten monetary policy until inflation is close to target – and stays there for a considerable time, noted Credit Suisse.
Therefore, the firm has further reduced its equity outlook to underweight from overweight at the beginning of this month, said Michael Strobaek, global chief investment officer.
“A slowing economy across geographies is exacerbating pressure on market dynamics and we think that risk assets, especially as they relate to corporate earnings, face further downward adjustments in the months ahead,” said Strobaek.
This also means investor should brace themselves for more market volatility, he added, as slowing growth along with rising inflation and interest rates are expected to stay the course.
As markets adjust to this “new reality”, Credit Suisse believes risks will be skewed to the downside, while asset prices remain volatile in the coming months.
“I think the absolute return outlook for both developed and emerging market equities is outright unattractive too,” said Strobaek.
“On a portfolio level, that means we are reducing equity positions to levels below the strategic allocation for the first time in several years.”
Diversification is key
In face of greater market volatility, investors should continue to keep diversifying portfolios as broadly as possible, including increasing exposure to alternative investments, including private market assets.
“Investments that can profit from this new regime such as private market solutions that have a longer-term focus, or emerging market hard currency bonds which offer a substantial yield pick-up to developed market bonds, are interesting opportunities in the current environment,” said Strobaek.
Active regional and sectoral management within equities is also important.
For instance, Credit Suisse avoids stocks in the European market due to exposure to a daunting mix of economic and geopolitical challenges in the next quarter.
Strobaek also noted that being underweight equities does not mean a complete exit from these markets.
“At inflation rates of close to 8% in many countries, holding too much cash would mean a guaranteed loss in purchasing power,” he explained.