With the Russian/Ukrainian crisis becoming common notice, market participants are expected to switch focus to fundamentals, such as the FED’s decision to start tightening its monetary policies.
As of now, the bond market is expecting eight 25-point hikes over the next year. If the plan, which was drafted prior to the Russian/Ukrainian crisis, is executed as announced, it would achieve a soft landing. Yet, with the crisis in place for a prolonged period of time, some demand has evaporated. On the other hand, input prices, so commodities, are expected to increase on the back of multiple supply disruptions. All this is supporting an acceleration of inflation. How much the equity market has already priced in is uncertain, but more volatility in the market should be expected.
Given the above, one should expect that longer term rates are likely to stay stable or even to fall. This in turn will be positive for growth stocks which have experienced the worst drawdown in the last 30 years and high-quality investment grade credit.
Our preferred areas continue to be high-quality growth stocks (in other words companies that have above average growth rates and are generating free-cashflows – these are mostly found in IT) as well as high-quality credit (Europe and US—both segments have never experienced any defaults and are therefore opportune after recent credit spread increases).