2Q 2022 Global Equity Outlook: Continued volatility and increased risk of recession

Continued volatility and increased risk of recession

CIO Matthew Benkendorf discusses supply chains, industrial activity, and consumer behavior as important drivers of economic growth, the impact of the US tightening cycle on emerging markets, and the possibility of recession at year end 2022 and into 2023.

• Market volatility heightened in the first quarter of 2022 as the war in Ukraine emerged. Investors are focused on the impact of the war on commodity and energy prices, and ultimately higher inflation and rising interest rates. All these issues are stark reminders to investors that events impacting the global economy and financial markets are becoming increasingly difficult to predict.
• Rising interest rates, declining fiscal stimulus, wage and price inflation, and lower consumer confidence increase the probability of potential monetary policy error and possible recession, which may become a reality towards the end of this year and into 2023. For the next few quarters, however, a normalization from COVID with respect to supply chains, industrial activity and consumer behavior should be important drivers of economic growth. Risk awareness in the markets can create opportunity and a focus on quality can help investors prepare for all outcomes.
• Health care and consumer staples, traditionally defensive sectors, have lagged recently. However, we believe durable and predictable businesses in these sectors are well positioned to combat an inflationary environment. Well-established consumer staples companies typically have healthy gross margins and have decades of experience handling rising input costs with pricing power.
• In a US tightening cycle, emerging market (EM) currencies tend to weaken, unless the governments in those countries also raise their rates. And higher commodity prices are positive for only some EM countries. Navigating a bifurcated landscape in EM will become increasingly difficult as the year progresses, requiring an astute focus on both company fundamentals and operating environments.
• EM economies aren't nearly as fragile as they used to be. Some EMs’ budget and current account balances are stronger than some developed markets (DM). EMs are trading at a valuation discount to DMs, and increased pressure on EM stocks has created opportunities.
• The SEC’s recently announced proposal requiring US companies to disclose their operational impact on climate change was positively received. In our view, regulatory action is the most effective way to push companies towards releasing better information and data, which can help set common standards across companies and industries.

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