Global Investment Committee’s Outlook: Stagflation-lite, Cautious On Both Equities And Bonds, Except Positive On Pacific Equities

Global Investment Committee’s Outlook: Stagflation-lite, cautious on both equities and bonds, except positive on Pacific equities

Global economic recovery slightly below consensus, with inflation above consensus

In our early December meeting, we, thinking that cooler heads would prevail, did not foresee the Ukraine crisis and the ensuing market conniptions. Somewhat oddly, however, our strong preference for global equities and negative view on global bonds was justified, with the latter sinking very sharply in USD terms, while the former actually rose about 2%. We expected GDP growth for the G-3 and China in the four quarters ahead to match consensus, but now consensus for that period is much lower. Due to the crisis, we also greatly underestimated how much commodity prices and bond yields would rise.

Looking forward in obviously murky conditions, on 30 March, out of the six macro-economic scenarios presented, our committee nearly unanimously agreed on a scenario in which the global economy continues to struggle in a form of “stagflation-lite”: slightly below market consensus of moderate G-3 GDP growth with inflation higher than consensus, coupled with geopolitical disruption that does not improve, but does not worsen much either. Included in the latter factor, we expect hacking to become more problematic, but we do not expect financial stability to be much disrupted by any of these negative factors.

Given this scenario, we expect corporate guidance in April’s earning season to be quite cautious, with global demand decelerating while margins are being squeezed by higher labour and other input costs. Supply chain disruptions should continue to burden profitability too. We have said for years that no one should doubt the ability of US corporations, in particular, to boost profits, but the quarters ahead should be especially challenging. Investor sentiment, meanwhile, will likely remain cautious, especially as we expect last week’s hopes for a much smoother path for the Ukraine conflict to be overly optimistic. Investors will also face the macro-economic and geopolitical worries mentioned above. Based on this backdrop, our fixed income and equity teams delivered targets that estimate relatively flat performance for global equities in aggregate for the next three to six months (although quite positive on Pacific equities), with moderate weakness for global bonds. We expect commodity prices to rise further, but not wildly so, and that central banks will be moderately more hawkish than they already are.

Our new scenario predicts that globally, GDP will underperform consensus, with the US up 1.3% at a Half on Half Seasonally Adjusted Annualized Rate (HoH SAAR, as used in all references below) in the 2Q22-3Q22 period and 1.8% in the 4Q22-1Q23 period (vs. consensus of 1.5% and 2.5%, respectively). Personal consumption should recover, especially for auto sales and the re-opening services sectors, while private capex should continue to improve in most sectors, especially technology. However, construction spending outside of the infrastructure sector will likely be constrained, while government spending should show subdued growth and net foreign trade will likely subtract significantly from GDP growth.