Investors need to accept and prepare for continued volatility in the second half of 2022, serving as an investment theme across fixed income and currencies as well as for equities.
This will herald further challenges for portfolios in a year that has been difficult. Despite the late-May recovery, equities are down year-to-date and government bonds have failed to provide protection as persistent inflation concerns have forced central banks to turn aggressive.
“We remain attentive to opportunities in volatility, which we consider as an asset class in its own right,” said Alexandre Tavazzi, Pictet WM’s chief investment officer (CIO) for Asia, and global head of the CIO office and macro research.
“We believe derivatives will continue to help to monetise high volatility and mitigate portfolio risk,” he added.
Precarious for portfolios
The investment landscape and economic environment remain fragile, as geopolitical tensions lead to an increasing weaponisation of assets.
This is reflected by the impact of the war in Ukraine on energy, with food looking like it will be next, as well as the threat looming over Chinese tech stocks’ US listings.
Such abundant uncertainties give reason for Pictet WM to be generally cautious. “Much will depend on central banks, especially the US Federal Reserve. [Our] central scenario is that by late summer, it will dial back on policy aggressiveness and avoid tipping the US economy into recession,” explained Tavazzi.
Mixed yet cautious on equities
Along with the continued health of US consumer spending, the firm believes this could provide some respite to equities. “But while a lot of the previous exuberance has been knocked out of equities, the situation is delicate, and we are conscious that corporate earnings and margins are coming under intense pressure,” he added.
This has led to the firm taking a neutral stance on stocks globally, even though it sees European stocks as comparatively cheap. Elsewhere, it is overweight the Swiss and Japanese equity markets – the former for its long-term defensive appeal, the latter for diversification benefits.
Meanwhile, in emerging markets, late May saw a break in the steady decline in earnings expectations that followed the invasion of Ukraine. “The impact of the gradual re-opening of China’s economy after covid lockdowns bears watching,” said Tavazzi.
Global bonds gaining traction
Within fixed income, Pictet WM has moved from underweight to neutral on global government bonds.
“This move is mostly driven by an upgrade in our stance on core euro government bonds. With yields becoming less dissuasive than before in Germany like in the US, signs are emerging that government paper may benefit again from its ‘safe haven’ status as the economic picture darkens and markets pare back their expectations for rises in base rates,” explained Tavazzi.
In credit, investors need to be ever-more attentive to quality as tightening financial conditions affect lower-grade credits.
Pictet WM, for example, is underweight high-yield bonds in euros and US dollars alike and is more cautious than before on US leveraged loans, while ‘positively neutral’ on US investment-grade credits since they are equipped to withstand more challenging financial conditions at the same time offering decent carry.
“We are also looking with increasing interest at short-term IG credit in Asia, which continues to offer attractive spreads per turn of leverage,” added Tavazzi.
