Multi-Asset Strategy Quarterly – July 2022

In this edition, Iain Cunningham and Michael Spinks explain how the three challenges they anticipated heading into 2022 have evolved. Russell Silberston assesses the energy transition’s complex relationship with inflation, before reviewing the policy announcements by the major central banks, and we close with a summary of our asset class views.

Jul 26, 2022

20 minutes

Multi-Asset team


Market observations
Thematic viewpoint
Policy review
Summary of high conviction asset class views
Fixed Income views
Currency views
Commodity views

Market observations

Close-up view of beautiful curved glass building
We had three main challenges entering 2022. Thinking through each of these market moving forces, it’s clear that change has either taken place or is underway.

Assessing the year so far

Iain Cunningham – Co-head of Multi-Asset Growth, Michael Spinks – Co-head of Multi-Asset Growth

The first half of 2022 has been a tumultuous one for capital markets, with both equity and bond indices posting significant declines. We came into this year highlighting three main challenges for asset markets and the global economy: slowing growth in China as a function of material prior tightening, developed market central banks – particularly the Federal Reserve (Fed) – being substantially behind the curve on inflation, and extended valuations across asset classes. As a result, our portfolios were positioned broadly with underweight equity, underweight fixed income and long US dollar versus Asian and European currency positions, as we sought to benefit from macro policy divergence between the Fed and other major central banks.

Thinking through each of these market moving forces, it’s clear that change has either taken place or is underway. In terms of China, we detailed earlier this year that policy makers had clearly pivoted. 2021 was a “window of opportunity to address structural imbalances” for Chinese policy makers, which involved taking policy tight in aggregate and a whole raft of market unfriendly policies. 2022 has, however, been identified as a year where “stability is the top priority”, and although COVID remains a challenge for China, policy is being eased and unfriendly policies are being parked to improve confidence and support growth. As a result of this, and attractive valuations in the region, we have been accumulating positions and moving overweight in Chinese and Hong Kong-listed equities through the first half of this year.

The Fed’s handbrake turn

In terms of the Fed being behind the curve, change is also now underway. After a handbrake turn in policy, the Fed has moved from printing money in January to some of the largest hikes in the Fed Funds Rate in decades, in addition to also enacting quantitative tightening. This has pushed financing rates across the economy sharply higher and tightened financial conditions. We believe evidence is emerging that the implementation of positive real market interest rates by the Fed is beginning to effect growth and inflation indicators.

Money supply, which had been growing at c.20% p.a. in the two years post the COVID shock and – in our view – has been a major source of inflationary pressures, has just contracted on a six-month rolling basis. We expect this will show up in weaker growth and inflation in six to 12 months. Similarly, the US manufacturing new orders to inventories ratio has moved into contraction and market-based measures of US inflation expectations, such as breakeven rates, have now been posting convincing declines. It appears that the Fed is no longer behind the curve, but the next question we have to ask ourselves is will this bout of central bank inflation fighting push major developed market economies into recession and if so, how deep will it be? We’re adopting a cautious approach here, given that inflation measures are lagging, and the pace of tightening has been swift.

Navigating the future environment

The implication is that we may soon enter an environment where both growth and inflation are weakening. As a result we have begun to close our underweights to duration. In FX, we have also substantially pared back long US dollar positions, due to our expectations that the US economy will be decelerating into 2023, while we expect China to be reaccelerating.

On valuations, there has been a significant adjustment in markets year-to date. In select developed market government bonds, we see real rate premia present now for the first time in years. In credit and equities, spreads have expanded, and multiples have derated, but we’re not yet convinced that valuations price a ‘tight’ liquidity environment, which we’re heading into. The natural process of a central bank tightening to choke off excess demand and pricing pressures is in motion, with the next phase being a slowdown in both growth and inflation. This leads us to believe it’s too soon to sound the all-clear for developed market risk assets.

General risks.
The value of investments, and any income generated from them, can fall as well as rise. Where charges are taken from capital, this may constrain future growth. Past performance is not a reliable indicator of future results. If any currency differs from the investor's home currency, returns may increase or decrease as a result of currency fluctuations. Investment objectives and performance targets are subject to change and may not necessarily be achieved, losses may be made. Environmental, social or governance related risk events or factors, if they occur, could cause a negative impact on the value of investments.

Specific risks.
Currency exchange: Changes in the relative values of different currencies may adversely affect the value of investments and any related income. Emerging market (inc. China): These markets carry a higher risk of financial loss than more developed markets as they may have less developed legal, political, economic or other systems. Commodity-related investment: Commodity prices can be extremely volatile and significant losses may be made. Default: There is a risk that the issuers of fixed income investments (e.g. bonds) may not be able to meet interest payments nor repay the money they have borrowed. The worse the credit quality of the issuer, the greater the risk of default and therefore investment loss. Equity investment: The value of equities (e.g. shares) and equity-related investments may vary according to company profits and future prospects as well as more general market factors. In the event of a company default (e.g. insolvency), the owners of their equity rank last in terms of any financial payment from that company.

Authored by

Multi-Asset team

Important Information

This communication is provided for general information only should not be construed as advice.

All the information in is believed to be reliable but may be inaccurate or incomplete. The views are those of the contributor at the time of publication and do not necessary reflect those of Ninety One.

Any opinions stated are honestly held but are not guaranteed and should not be relied upon.

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