Key Points:

  • Raise the bar on cash and alternatives. Move slightly underweight Growth assets and maintain the large underweight in Defensive assets. The correction in equities, thus far, is consistent with those seen just prior to recessions. A tactical rally is possible, given the equity market has never got the recession call right. However, the biggest concern is the bond market is nearly pricing a recession and its track record in getting it right is nearly perfect.
  • Build an underweight in Growth assets using the US, Europe, and EM. Australia and Japan are our preferred equity market exposures. Key US business surveys are signaling a recession and adding to evidence from equity market trading and bond markets. Our confidence in a recession will increase if the surveys and bond market pricing are maintained for a few more months and this seems likely. Avoiding a recession looks unlikely, but may be averted if, central banks signal that tightening less than market expectations is needed. Easing tensions ease in Ukraine, or supply chain pressures are also potential catalysts.
  • The Growth asset sell-off has been valuation-led thus far. A range of valuation methodologies show equities are only back to around fair value after the sell-off. Analysts still expect mid-single-digit earnings growth over the next 12 months, which is in line with our modelling. The trigger for another leg down would likely be a wave of earnings downgrades or a sharp slowdown in key macro lead indicators. Financial conditions and manufacturing demand are not yet at levels consistent with an earnings recession.
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