After a strong and relatively smooth run in 2021, this year has been a volatile ride for investors. While we have edged down our risk allocation a little, we continue to stay cautiously constructive but are prepared to adapt our portfolio to the macro and geopolitical backdrop.
In our second quarter asset allocation strategy we detail the key signposts we are watching to move either more cautiously or more positively on risk assets:
- Is the peak in US inflation close at hand or will it prove more stubborn? Our base case is another CPI increase in the March reading (April 12), but we expect that will be the peak.
- US reporting season – more upside surprise or margin pressure? Our central case is another good reporting season.
- Escalation in Russia-Ukraine hostilities or a negotiated truce? We see a settlement in coming weeks or months as a logical outcome, but tail risks remain significant.
- European economic data – rolling over or resilient? Europe looks resilient at present, but this resilience has its limits. A Russian energy embargo into Europe is unlikely but cannot be completely discounted.
- Will the Fed be more or less hawkish than priced at its May 3 meeting? The Fed’s guidance come May is hard to call, though we expect some inflation relief to calm the Fed and the front end of the curve over the balance of 2022.
- Will COVID derail Chinese growth? The Omicron variant has spread to multiple regions across China in March, leading to tightened mobility restrictions, mass testing, and lockdowns in multiple cities. China’s strict COVID policy is likely to stay in force for some time. The negative impact on growth is likely to be offset by policy support, but near-term growth estimates likely have some downside risk. At the same time, these recurrent outbreaks represent another challenge for the global supply chain.
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Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.