23 june 2022


Welcome to CLEARCUT, a monthly discussion on macro and allocation


  • Central Banks accelerate the tightening of monetary policy in response to higher spring inflation data.
  • The growth outlook continues to deteriorate as a recession in 2023 increasingly looks like a base case.
  • We are overweight fixed income with a preference for core government bonds and high quality non-cyclical credit.
  • We remain cautious on equities despite improving valuations as the earnings outlook slides.

It’s a bear_ The major stock market indices have fallen by more than 20% since the beginning of the year. Sharp rallies have already occurred but have faded rapidly as the trend has turned negative. While investor sentiment has been at depressed levels for months, equity positioning has yet to adjust more materially. The length of any bear market is uncertain however, a positive turn in leading indicators and a reversal of restrictive policies will be the main signs to monitor before taking a more positive aggregate view on equities. However, the increasingly volatile and illiquid environment is highly likely to generate attractive entry points. Accumulating positions in stocks at attractive multiples from companies with low earnings risk and/or exposed to a positive secular trend constitutes a relevant approach. Renewable energy, cybersecurity, and a few healthcare segments fit that profile.

Correlations_ What has made 2022 such a challenging year in financial markets is the lack of diversification benefits offered by a multi-asset approach. Indeed, inflation fighting dominates the Central Banks’ agenda: they are tightening aggressively just as economic growth is slowing hard. Correlation between bonds and stocks has been quite positive since the beginning of the year as bond markets priced ever more rate hikes. Energy commodities and the USD have been the main traditional assets providing positive returns. A sustained decrease in inflation numbers in a context of fast deteriorating growth picture will likely bring correlations back down or to negative levels. Don’t kill the 60/40 just yet.

Inflation: high now but no regime shift_ The energy supply shock has exacerbated inflation pressures from elevated short-term demand following exceptionally large and direct fiscal stimulus and global supply chain disruptions linked to sanitary restrictions. Supply chain issues are starting to clear and signs of weakening aggregate demand mount and will likely accelerate on fast deteriorating credit and fiscal impulses. However, the short-term outlook for oil and gas prices remains highly uncertain on tight supply conditions and will drive headline inflation volatility in the coming months. Looking further out, structural factors dampening inflation and nominal growth potential remain in place: heavy debt burdens, stagnating to slow growth of the labour force, technological advances and productivity gains. This is evidenced by stable to falling inflation breakeven rates on the intermediary to longer parts of the curve. The EUR 5Y5Y inflation swap is also very close to the 2% objective of the ECB.