Equity markets face a challenge in the form of significantly tighter monetary policy but the asset class should still outperform fixed income. In the current environment our preference is for equity exposure in markets with attractive valuations and relatively supportive monetary/fiscal policy, namely, China and Japan.
Equity markets rallied into the end of first quarter 2022 as the worst predictions of how the Ukraine war might go were unfulfilled and investors placed hope in a negotiated solution.
While markets seesaw on news reports, expectations for the level of central bank policy rates are moving higher as inflation repeatedly outpaces expectations. In contrast to the start of 2022, however, the corresponding rise in real yields has not led to an equity market sell-off. Our concern is that at some stage, the focus will return to the prospect of higher discount rates. The fact that GDP growth prior to the conflict’s outbreak was well above trend does provide some cushion for equities.
Though rising rates will challenge equity returns, the asset class should still outperform fixed income. We prefer to take our equity exposure in markets with attractive valuations and supportive monetary/fiscal policy, namely, China and Japan.
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