Quarterly Insight - Q4 2022

Slowing economic momentum, surging inflation, tighter monetary policy, and heightened geopolitical tensions have roiled financial markets in Q3. Globally, we see inflation peaking in coming quarters, albeit we expect disinflation to be a painfully slow process. Upstream inflationary pressures are cooling down, but wages are starting to press upward with tight labor markets. This will make the life of central bankers difficult as they try to return inflation to their target, irrespective of the cost to economic growth, even if that means pushing the economy into recession. Economic activity in many developed countries is set to contract, while China should gather a more positive momentum. Uncertainties are here to stay, with energy shortages in Europe, COVID cases in China, and geopolitical developments to spur bouts of volatility in Q4.

We thus maintain a cautious tactical asset allocation going into year-end. We hold our short duration stance as we have no confidence that we have yet reached peak yields in this cycle. We remain wary on credit globally as it could catch up equity on the downside given the souring of macro conditions. We maintain an underweight in equity, as we do not call for the bottom of the bear market just yet. Earnings expectations are too high in our view given the macro backdrop, and we doubt profit margins can remain stable as companies face more difficulties keeping their pricing power going forward. Though we acknowledge that the cycle is stretched, we remain mildly optimistic about the US dollar. The greenback is expensive, but it is still the mighty king of safe havens.