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Less Globalisation Over the Medium- To Longer Term

Global Macro: The pandemic and the war in Ukraine will probably accelerate a trend towards less globalisation, with less emphasis on efficiency and more on security. We would expect that the gains from globalisation, such as lower inflationary pressures, low interest rates and productivity gains from increased specialisation to go into reverse too. Over the medium- to longer term, this would imply an increase in real interest rates, structurally lower equity returns and more of a headwind to asset prices in general.
Global fixed Income: Looking at a shorter time horizon, we note that developed markets’ (DM) government bonds offer a much better risk/return trade off compared to 12 months ago and it looks increasingly likely that the market’s focus will shift from inflation to the negative growth implications brought about by the rapid and aggressive tightening. We believe that demand for high quality duration should pick up in the second half of the year.
Emerging markets strategy: Emerging Markets (EM) credit spreads have increased significantly as external financial conditions have tightened. On balance, EM credit ratings have deteriorated since the pandemic started. In this high volatility environment, we remain cautious on high-yield EM bonds and favour energy exporters and those EMs that rely less on external demand.  
US equities: Finally, earnings will matter a lot more for market performance in the second half of 2022. Macro uncertainty has clearly risen over the past 3 months and cracks are starting to show with regards to the well-being of the corporate sector. We think the list of issues for companies is all but growing and can be summarised as the following five C’s: consumer, commodities, currency, capital markets and cost.

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