We have been gradually reducing our exposure to equities and credit over the last few months based not only on fundamental & technical indicators but also on systematic risk balancing. As a further step in this de-risking process, we are downgrading our equity view by another notch, from cautious to disinclination. We believe that a clear reduction in exposure to European markets is warranted in a context of huge uncertainty created by the war in Ukraine. We chose to sit on the sideline and wait for more visibility, on the geopolitical, economic and corporate earnings outlook.

SPECIAL ASSET ALLOCATION INSIGHTS The Russia-Ukraine conflict has pushed geopolitical risk to a very high level and is having a meaningful impact on global financial markets today through: 1. the rise of equity risk premium, 2. tighter financial conditions and 3. higher inflation ahead due to rising energy costs. We held an extraordinary investment strategy meeting this morning and would like to share our key takeaways below.

It has been a rough start to 2022 for risk assets as expectations of more rapid monetary policy tightening and inflation concerns pushed equities and bonds to sell-off simultaneously. The biggest macroeconomic development so far in 2022 is undoubtedly the hawkish pivot by both the US Federal Reserve and the European Central Bank in response to persistent inflation. But after a hectic January, and despite widening credit and European periphery spreads, global stocks saw some sense of calm return last week with narrowed down intraday swings.

Markets started 2022 with a bit of a bang for investors. Equities and bonds fell in tandem on the back of Fed minutes which turned out to be more hawkish than expected, leading to US 10-year bond yields to break critical levels. Despite a potentially less supportive liquidity outlook in the months ahead, current signals lead us to maintain a positive stance on risk assets and equity in particular. Global growth remains above potential, financial conditions remain supportive, global earnings growth remains well oriented and some segments of the market remain reasonably valued. Last but not least, our market technical indicators (trend, sentiment, etc.) continue to be positively oriented.

Volatility made a comeback in the last few weeks, triggered by concerns that the US Federal Reserve could taper its monthly asset purchases at a faster rate and fears that the emergence of Omicron could weigh on global economic growth and contribute to supply chain disruptions. As we are heading towards a new year, we are concerned by the high level of valuations of some market segments (e.g. US equities) at the time of normalization of monetary policies. Moreover, some technical signals such as market breadth are pointing towards some negative divergence. That said, the weight of the evidence leads us to keep a positive stance on risk assets and equity in particular.

By most measures, 2021 will be remembered as an extraordinary year for global risk assets and the world economy. At the time of writing, stocks, home prices and cryptocurrencies are all at record levels while the price of energy, food and industrial metals keep rising. Meanwhile, US inflation is at a 30-year high while job openings and wages are surging.

We keep our positive stance on risk assets and equity in particular. In the near-term, we continue to believe that strong earnings growth will more than offset the coming gradual normalization in fiscal and monetary policy. - While monetary policies are becoming more uncertain and despite the fact that some of our technical indicators have deteriorated recently, equities are still the most attractive asset class given solid growth prospects, negative real bond yields, positive earnings momentum and favorable seasonality. - From a tactical standpoint, we are upgrading Japan equities from positive to preference and UK equities from cautious to positive. Both markets are attractively valued, are benefiting from positive macro momentum and are pro-cyclical in nature. - In light of ongoing inflationary pressures and monetary policy normalization, we see upward risks on long term rates and stay cautious on government bonds and spreads. - We remain cautious on commodities and stick to our (short-term) bullish view on the dollar. Our tactical asset allocation is summarized in the matrix at the end of the article.

We are reducing part of our overweight equity stance in light of a more uncertain liquidity environment and the deterioration of some of our technical indicators.

18 months into the Covid pandemic, the world economy has experienced its shortest yet deepest recession ever, followed by one of the strongest recoveries on record, thanks to historic levels of government and central bank support. The magnitude of the shock, and the uncertainties around its impact on the economic outlook, meant financial markets oscillated between despair and hope, with occasional spikes in both directions. Europe’s summer marks another step in this atypical economic cycle with a transition from recovery to an environment of steadier growth.

The ongoing global recovery is very strong. World economic growth this year will be the highest in at least four decades as economies recover from 2020’s huge shock. Evidence of this spectacular recovery already widespread, especially in the United States, which is once again leading the global economy thanks to fiscal stimulus and a swift and successful vaccine campaign. The reopening of business activity has unleashed record pent-up demand. Europe is also about to experience a similar boost as it gradually lifts pandemic- related restrictions.