Switching gears: traversing a slowing growth environment

Executive summary

  • The investment environment has become particularly challenging, as markets have corrected sharply, earnings growth is slowing, and interest rates are rising. Extremely high inflation has increased the risk that tighter policy may eventually cause a slump in growth, especially if the highly leveraged economy proves more sensitive than expected to rising interest rates.
  • With significant headwinds from weaker growth, tighter liquidity, and rising interest rates, we have become negative on global equities. That said, global markets are differentiated, where the US may remain the strongest given its growth is still above trend. In contrast, Europe faces greater headwinds from adverse stagflation forces, while Asia faces greater risks of a ‘hard landing’ in China. As a result, we maintain our negative outlook on Asian and Chinese equities.
  • Managing portfolio drawdowns from potentially painful corrections is prudent, with the aim of being well positioned to take advantage of opportunities once headwinds fade. We continue to favour sectors like consumer products, communications, healthcare, and renewables, as they seem well positioned to withstand the challenging macro backdrop. Investors should be extra cautious, but remain active as growth assets, like equities and real estate, have favourable longer-term trends that can potentially outperform inflation.
  • We remain negative on Asian corporate credit as there is likely to be less spread compression ahead, tighter liquidity, and more credit risks.
  • We maintain our positive USD outlook, as markets have become more hawkish on Fed rate hikes, positioning is positive, and the US terms of trade remains supportive.

You can also hear from our Strategist Robert St Clair, who discusses sectors and opportunities that may be favourable in a slowing growth environment.