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Gradual slowdown

Investment update

23/02/2022 • 3 minute read

Richard de Groot

Rising interest rates and slowing growth are increasing market nervousness and denting opportunities for stocks in 2022. ABN AMRO has reduced equity exposure in favour of cash.

After record bull markets in 2021, the outlook for stocks has become more uncertain. Since the beginning of the year, markets have already declined by around 5-7%. Economic growth and corporate earnings are expected to deteriorate through 2022 and into 2023. Inflation is rising and central banks are expected to raise interest rates and tighten monetary policies to combat it.

Market volatility has been increasing, as inflation and central bank actions dominate sentiment. Moreover, fear of rising interest rates is no longer confined to the US. The European Central Bank (ECB) has also changed its tone regarding the accommodative policies it adopted in reaction to the pandemic and lockdowns.

US Treasury and German Bund yields have been rising in tandem, and the market is now pricing-in a rate hike by the European Central Bank (ECB) in June. We do not expect a hike from the ECB until December, but we do expect that the Federal Reserve will begin an extended rate-hiking cycle in March.

In this environment, the ABN AMRO Investment Committee took steps to reduce risk by decreasing stock exposure, moving from an overweight to a neutral stance. The proceeds will be allocated to cash. The allocation to bonds remains underweight. Within the equity portfolio, the allocation to the industrials sector was decreased (to underweight) while consumer staples was increased (to neutral).

Diminished outlook for stocks

Rising inflation and concern over changing central bank policies at a time when growth is slowing have made the outlook for stocks and earnings growth more uncertain. Inflation is a two-edged sword that hurts consumer spending and corporate margins at the same time. Energy and commodity prices are a related concern, as the drastic increases over the past months have rattled sentiment and markets. The news around Ukraine and Russia adds further uncertainty to an already volatile outlook. For these reasons, we have reduced equity risk and moved to a neutral position. At the same time, we have taken another step to increase the defensiveness of the stock portfolio by increasing exposure to consumer staples at the expense of industrials. The consumer staples sector, including food, beverages and household products, can act as a safe haven when market volatility is high.

Turbulent bond markets

With inflation higher than expected in both the US and Europe, bond markets have been turbulent. The effect of a more hawkish ECB was seen in markets. US Treasury yields moved upward to around 2.0% and Bunds rose to 0.28%. (Bond yields move in the opposite direction of bond prices.) We continue to prefer high-yield bonds and emerging-markets debt.

Conclusion

The factors that drove equity markets last year are fading or reversing. Instead, we expect slowing growth, higher inflation for a longer period and, as a result, less accommodative central banks. To navigate this new reality, we have reduced risk and increased cash. With this positioning, we retain significant exposure to equity markets but with an increased cash buffer. It provides some protection from volatile markets while also enabling us to take advantage of future market opportunities should they occur.

Richard de Groot, Chair
ABN AMRO Investment Committee

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