Recent geopolitical developments made an abrupt end to 30 years of global integration and harmonization between the three major political and economic systems.
While the market is rebounding now, volatility will likely remain elevated on the back of political and economic uncertainties. As of now, the market is increasingly pricing the potential for some kind of stagflation, i.e., inflation is tending higher (mainly because of rising input prices for commodities and energy) while economic growth is limited.
Here are some key points for further consideration:
- For the Central Bank, there is clearly a challenge to managing inflation expectations and stimulating growth while global tensions remain high. While the path of the economy is manageable by the Central Bank, an eventual shift in consumer spending and consumer behavior is clearly outside their direct control.
- As of now, consumers are clearly expected to shift their attention from goods to services. This in turn will fuel recovery in stocks, e-commerce opportunities, and entertainment activities such as travel.
- Finally, we note while a good number of companies have a relative strong pricing power that shelters from lower sale due to non-adjusted prices. Yet, an extraordinary pull-forward of inflation could jeopardize this strength.
Our take on the above:
- Given the economic and political uncertainties, it is an opportune time to recalibrate opportunities and their respective return expectations, while risk will remain above historic average for the quarters to come.
- The market looks attractive in terms of valuation, but we would refrain from being fully invested. Rather, we would suggest starting with “cherry-picking” attractive opportunities in the growth sector.
- Our preferred sectors are energy, materials, enablers in IT related to IIoT, and biotechnology.
- We expect that interest rate rises will be less frequent. Therefore, long duration assets are making their comeback.
- We prefer small cap categories over large cap and emerging markets over Europe.