As the world tackles high inflation rates, this week Swiss bank Julius Baer released its global market outlook for the year-end 2022, and an investment guide for Asia.
Despite high inflation levels, Julius Baer believes that inflation is mostly past its peak, and real assets such as equities should remain at the top of the list, although fixed income markets have become more attractive too.
The Swiss private bank is convinced that the secular equity bull market is continuing and that the coming months bode well in the search for new investment opportunities over the next three to five years.
The market rout in the first half of the year has also proved the value of holding alternative assets, the firm said in a statement.
According to the Swiss bank, growth and inflation dynamics are likely to be the dominant drivers of investor risk appetite into the year end. Some volatility can also be expected in the process, but eventually headwinds for risk assets should ease.
“Our view is that central banks have been in peak-tightening mode over the summer months and that inflation, while volatile, is mostly past its peak," David Kohl, chief economist at Julius Baer, said.
“Drivers of abating inflationary pressures are the sharpest global monetary tightening in 40 years, broadly lower commodity prices, a relaxation in supply-chain pressures, and the growth slowdown. We expect central bank tightening measures to level off and largely avoid an overshooting,” he said.
Looking at investment opportunities in developed markets, Mathieu Racheter, head of Equity Strategy of Julius Baer, said: “Defensives with a focus on Swiss, healthcare, and high-dividend stocks are more attractive than cyclicals, given slower growth and earnings weakness ahead.”
“Limited upside to bond yields means that there is a tactical opportunity in profitable growth stocks. Yet, value stocks still have their place in every portfolio, given structurally higher inflation,” he said.
Focusing on the sweet spot in fixed income amid a slowing economy, Dario Messi of the fixed income research team at the bank, added: “Central banks wary of high inflation and growth concerns can mean some volatility in fixed income.”
“Our more prudent approach calls for exposure to euro and US dollar low-investment-grade bonds with medium duration (three to five years). This segment offers the combination of attractive income generation and reduced credit-risk sensitivity. US Treasuries are attractive on weakness,” he said.
For investors looking to invest in emerging markets, Mark Matthews, head of Research APAC, said this of emerging market equities: “We have a neutral rating on emerging markets due to global growth headwinds and the strong US dollar, but the segment is no monolith.”
“Investors looking to gain exposure can focus on Southeast Asia due to the unleashing of pent-up demand as Covid-19 restrictions have only been lifted recently,” he said
“Secular growth themes are our preferred venue for Chinese equities, in particular the environment (renewables and electric vehicles), high-end manufacturing (semiconductors and industrial automation), and mass consumption (beverages and sportswear),” he added.