Vontobel Multi Asset Boutique
“There is no alternative (to stocks)” used to be the mantra on financial markets in the past few years. No longer. Higher-than-expected inflation and central banks’ frantic countermeasures have sent share valuations and prices south. In voting with their feet, equity investors have waved “Tina” good-bye.
They can’t be blamed. A long-forgotten scourge of people’s lives has reared its ugly head – yes, a brutal war in Europe, and that’s troubling enough. But perhaps as important in market terms, inflation. Gone are the days of ultra-cheap fuel or food. Decades of easy money and more recent developments such as deglobalization or the energy transition have brought a wave of rising prices, denting household budgets and giving rise to all kinds of inventive ways to save a dollar – even instructions how to siphon off fuel from somebody else’s car recently aired on Greek television.
During past crises, investors often took comfort in the relative shelter a balanced portfolio of equities and bonds provided. But it was different this time. Bonds, meant to shield us from an equity market downturn, sold off in tandem. The only asset class to do well so far this year has been commodities.
In April, I suggested that investors rethink the bond part of a traditional 60/40 portfolio, allocating larger amounts to strategies that held their own, for instance gold and commodities. This still holds true, but what to do about the bigger chunk of a model portfolio, equities, that investors simply cannot do without? True, rocketing consumer prices and tighter monetary policies are hardly a draw. That said, we think that central banks will be successful in bringing inflation lower. Moreover, we have already seen first signs of the so-called demand destruction – a markedly lower uptake that will eventually drag prices down.
A neutral view on equities is reasonable given that we neither expect a broad and severe global recession, nor do we have enough evidence of a soft landing yet. Our positioning within this asset class remains defensive but it’s worth noting that after the sell-off, there are pockets in global markets that are looking appealing. From our point of view, it’s high-quality companies with solid free cash flows or, for those with a higher risk appetite, the biotechnology sector.
It’s probably safe to say that no matter what, inflation will stay with us as the number one topic at summer barbecues, eclipsing the weather as a conversation item. So do enjoy the summer, go to lakeside parties in Zurich or elsewhere, keep talking about the high price of everything but don’t completely forget the “buy” key on your laptop. The moment to re-engage may come near or past the point of peak inflation and “peak hawkishness” on the part of central banks. In the meantime, stay invested and take a fresh look when you come back from holiday.