Capital Calls

Published on: 23 May 2022

These are our highest conviction macro calls, and their market implications. These calls are rooted in our macroeconomic analysis, selected according to the strength of our views and with an emphasis on assets that are widely tradeable. Current calls include that global equity markets will remain under pressure and the US dollar will rise further.

The big picture

The global recovery will continue to disappoint, with growth well below consensus expectations across the major economies. Despite soft economic activity, most major central banks will continue to tighten monetary policy aggressively to combat above-target inflation. Commodity prices will remain high amid supply disruption, benefitting economies which export raw materials at the expense of importers. Europe will flirt with a recession as the economic fallout from the war in Ukraine bites, while China's economy struggles with lockdowns, a property slump and fading export demand.

While the worst of the bond market sell-off is probably behind us, core government bond yields will rise further as the global tightening cycle continues. But with discount rates rising and economic growth disappointing, the outlook for risky assets remains fraught. While equity market valuations have fallen, they still look elevated relative to the past, at least in the US. And with analysts’ expectations for firms’ earnings still looking quite rosy, there is ample room for disappointment as the global economy slows. Rising bond yields means that the rotation from “growth” to “value” stocks will continue as the rate-sensitive tech sector falters and more defensive sectors hold up best.

Developed markets

Equity markets will remain under pressure

The combination of hawkish central banks, rising bond yields, and faltering growth has proven a challenging one for most risky assets, which have fallen sharply this year. The “stagflation-lite” environment now taking hold means further pain is in store: equities will not turn the corner decisively until central banks ease off on policy tightening and fears of a major global downturn fade.

The US dollar rally will continue

The combination of aggressive tightening from the Fed and worsening risk appetite has driven the dollar to its strongest level, in aggregate, since the early 2000s. We expect it to extend those gains as most major central banks struggle to match the Fed’s hawkishness and economic growth slows more sharply in Europe and Asia than in the US. We forecast EUR/USD to fall to parity; the renminbi to weaken to 7 per dollar, and the yen to fall further even after its precipitous plunge over the past couple of months.

Emerging markets

Financial contagion from the Russia-Ukraine war will remain limited

Sanctions and extreme economic uncertainty have already crippled Russia’s economy and financial markets. Russian assets generally will probably remain un-investable for Western investors for some time. But, while financial conditions have tightened elsewhere as well, the global financial system has so far proven resilient. We think that will remain the case, and that in the event of a more material deterioration of market functioning central banks would step in quickly to restore stability.

We also don’t anticipate significant spillovers to most major EMs – many of the economies where balance sheets look most vulnerable are commodity exporters (e.g. Brazil and South Africa) which will benefit from the surge in commodity prices, improving their ability to weather this storm. Among the major EMs, Turkey faces the greatest risks: its financial situation has been precarious for some time, it has significant trade links to Russia, and imports most of its energy needs. The most acute risks are among frontier markets with large foreign currency debt loads, such as Sri Lanka, Ghana and Tunisia.

China’s government bonds will rally even as those elsewhere sell off and its equity market will continue to struggle

While China will manage the economic fallout from the war, economic growth in China will remain weak and policymakers will ease policy further as the property slump and ongoing lockdowns take their toll. As a result, the 10-year government bond yield in China will continue to edge lower, even as yields in much of the rest of the world rise.

China’s equities – which are already in a bear market after their sharp drop in 2021 – will continue to struggle as soft growth, ongoing problems in the property sector, and the “common prosperity” drive championed by the authorities continue to put pressure on the margins and business models of many businesses. Even after the falls over the past year, their valuations do not yet seem particularly supportive.


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