Niall Paul

Market Outlook

International Outlook

Outlook

Latest International economic and market outlook. 

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In recent months we have seen a significant sell-off in global equities, with most markets now looking reasonably cheap. Inflation and central bank tightening remain key concerns, but the former has probably peaked, and we believe it is now unlikely that rate hikes exceed investor expectations. Whilst market valuations appear reasonably attractive, we are mindful of the risk of further earnings downgrades. Indeed, the downgrades that we have seen thus far have not been as significant as in a typical recession or bear market. We would characterise the last few weeks as a bear-market rally, of which we are perhaps two-thirds of the way through. We have been using this opportunity to fade down some of our lower conviction names and prepare for more market volatility and potential downside ahead. Thus, our view could be described as tactically optimistic, but strategically cautious. 

In terms of catalysts required for market sentiment to shift decisively, perhaps the most important would be an easing of inflationary pressures that allows the Fed to tighten less aggressively. Another catalyst would be any positive progress with Russia and Ukraine as this would lower the risk premium and help to reduce inflationary pressures. China becoming sufficiently vaccinated to ditch its zero-COVID policy would also be a key catalyst. Unfortunately at this stage there is limited visibility on any of these issues, except perhaps inflation to some degree. Although we think inflation has likely peaked, the problem is that it has done so at a very high level and, unless it comes down much quicker than investors and policymakers expect, it’s hard to see the Fed backing off any time soon. With regard to China, it appears that the situation is improving in Shanghai, which could provide some short-term respite, but we remain mindful that the zero-COVID policy hasn’t changed, so it is quite possible that we see more lockdowns in the future, at least until the Chinese population has been sufficiently vaccinated. 

With all that in mind, portfolio positioning remains reasonably defensive, with a relatively large cash balance and exposure to businesses with very healthy balance sheets and strong, defensive revenue exposures. 

Thematically, we retain exposure to the reopening trade in the form of the transport and leisure sector, albeit at a reduced weight, as well as electrification and mining capex. The latter should remain strong – despite the macro uncertainty – due to severe and ongoing shortages in the mining sector. 

Important Information:
Nothing in this document constitutes or should be treated as investment advice or an offer to buy or sell any security or other investment. TT is authorised and regulated in the United Kingdom by the Financial Conduct Authority (FCA).

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