The Swiss bank Credit Suisse published this week the global investment forecast for the second half of 2022. The forecasts were updated against the background of recent global events, primarily the war in Ukraine and the tense relations between the United States and China, and now The bank’s investment committee recommends reducing the weight of stocks in investment portfolios.
The bank’s chief economist, Michael Strubek, warns that “the coming months may be difficult for investors”, so he thinks that one should be careful and reduce risks. Instead, Strubek recommends that investors reduce their weight in global stocks, this after the Federal Reserve’s annual policy conference held in Jackson Hole on the weekend, where the central banks, led by Chairman Jerome Powell, emphasized their focused commitment to curb inflation through higher interest rates.
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A report by Credit Suisse mentions that at last year’s conference Powell presented the reason for his belief that inflation may prove to be “temporary”, while at this year’s conference the atmosphere was completely the opposite. In a speech that resonated throughout the markets, Powell stated firmly that the Fed is committed to lowering inflation and that they see that task as their “overall focus right now.”
Powell’s speech led to very negative reactions from the markets – both in stocks and bonds. Stock traders around the world bet wrongly that the Fed might signal at Jackson Hole that it would slow its tightening, but stocks fell sharply in the two days after the speech, after the chairman took away from the episode any glimmer of hope for an earlier-than-expected move to looser monetary policy.
Strobek says that at the meeting of the investment committee on Monday this week, “we decided to further reduce our exposure to stocks. We also now believe that the absolute return forecast for stocks is clearly not attractive for the coming months.”
Credit Suisse points out that investors are once again facing an environment similar to that of the first half of the year, i.e. a slowdown in growth, an increase in the likelihood of a recession, increased inflation, and after the conference in Jackson Hole, also central banks determined to tighten monetary policy. The bank’s investment committee believes that this environment can also lead to a similar behavior of asset prices, and as a result decided to reduce the risk and reduced the weight of the shares as part of its tactical position.
“The investment committee considers the absolute return forecast, both for shares in the developed market (DM) and for shares in emerging markets (EM), to be clearly unattractive. At the portfolio level, this means that we are reducing the positions in shares to levels lower than the strategic allocation,” the committee’s report stated.
More emerging market bonds, less stocks
While the coming months will see more volatility, Strubek still advises investors not to get out of stocks entirely. With inflation rates of 8-9% in many countries, holding too much cash means a “guaranteed loss of purchasing power,” he said.
Instead, the Swiss bank recommends that investors hold assets that can benefit in the longer term or emerging market bonds, which offer a significant yield advantage over developed market debt.
“I believe we are going to a ‘mental account’ in the coming months,” he concluded. “For now, we take solace in being extra cautious.”