Insights

“Finish your plate!” is a line often heard around dinner tables, but what if there suddenly isn’t enough food to go around? We believe the financial industry can make a humble contribution to right this wrong by investing in the “right companies”. Call this approach “putting your money where your mouth is”.

Our models are signaling that not only the economy but also the risk environment is deteriorating further. Possible further interest rate hikes are weighing on both equity and bond markets, with no relief in sight at present.

The Queen may have remembered 1992 as her “annus horribilis,” but for financial markets and particularly multi-asset investors, it’s 2022 that deserves this sorry distinction. However, with Jerome Powell moving the federal funds rate ever higher, “60/40” may yet be back in fashion, according to our multi-asset expert Anton Oberhofer.

At the Jackson Hole summit, Jerome Powell didn’t yield an inch to critics of his policy, flying his fierce inflation-fighting colors instead. With the powerful US Fed chief blazing the tightening trail, other heads of central banks will follow. This is one reason why Dan Scott and Vontobel’s investment strategists expect inflation to come down.

At Jackson Hole, any lingering hopes for a swift dovish pivot by central banks due to a deteriorating growth outlook were finally wiped out. In response, markets tanked and put a firm end to what we can now all agree was a mere bear market rally over the summer months. Now, it is time to focus on risk in portfolio construction and resort to assets that offer some shelter from higher volatility levels.

Our models signal that we are still in troubled waters. Moreover, the data do not yet give the green light for a sustained economic recovery. The bear market therefore still has room to run.

In recent weeks, our in-house risk model has increasingly weighted the run-up to the financial crisis of 2007. This means that the model is finding more and more similarities with the financial market situation in this period. Can these parallels be interpreted as a prophecy or is everything different this time?

In the latest Global Market Outlook, our specialist team for quantitative investing and active risk premium management explains what the models are signaling as Europe worries about energy shortages and the US slips into a recession.

For a sustainable recovery central banks may have to switch out of tightening into easing mode. This is unlikely to happen as long as inflation rages on. In the meantime, equities might still be a better bet than spread products as liquidity and European fragmentation risks in debt markets loom, while currencies will become more important as alpha sources in portfolios.