Russell Investments Global Market Outlook: Strategists see ‘fear of the known’ driving mid-year market outlook


SEATTLE–(BUSINESS WIRE)–As recession fears and central bank tightening fuel market volatility in mid-2022, strategists at Russell Investments believe that underlying inflation in the United States has likely reached a low. peak and markets should stabilize and possibly recover in the second half of the year.

“At the start of 2022, it was unclear how much inflation would rise, how aggressively central banks would react, and whether Russia would launch a full-scale invasion of Ukraine. Underlying inflation appears to be peaking in the U.S. mid-year and markets are pricing in relatively aggressive tightening paths for most central banks,” said Andrew Pease, Global Head of Investment Strategy at Russell Investments. “These issues are at least now well understood by the markets.”

Russell Investments’ Composite Sentiment Index, which measures investor sentiment for the S&P 500® Index (via a range of technical, positioning and survey indicators) mid-year, reads as deeply oversold. This reassures strategists that markets have priced in the bad news so far and could rally if inflation and growth turn out to be better than markets currently fear.

“It’s possible for investors to panic and reach a point of capitulation of selling everything, but the lesson from previous market corrections is that times of panic can provide the best opportunities for longer-term investors,” Pease said.

Pease sees the US economy as the main uncertainty for the global outlook. He thinks the pace and depth of tightening by the US Federal Reserve (Fed) creates the risk of a recession by the second half of 2023. Although a deep recession could trigger a bigger bear market, he expects a slowdown or a mild recession as the two most likely outcomes. The upside risk to the US economy and markets comes from the possibility that underlying US inflation has peaked. This, combined with some easing in the labor market, could allow the Fed to become less hawkish in the second half.

As for the outlook for Europe, the biggest risk hinges on Russia’s response to the European Union’s embargo on its oil exports by cutting off gas supplies to the region. “Europe’s heavy dependence on Russian gas means that retaliation and a sharp rise in gas prices would almost certainly push the region into recession,” Pease said.

Russell Investments’ Mid-2022 Cycle, Value and Sentiment Investment Decision-Making Process warns against excessive pessimism. Sentiment is extremely oversold and at levels last seen during the March 2020 COVID-19 market panic. The firm’s valuation methodology sees US Treasuries as cheap, while valuations stocks are more difficult to compare due to the current uncertainties around the mean reversion of the price/price ratio. earnings multiples (PE) and profit margins.

The firm’s strategists summarize their mid-year asset class preferences as follows:

  • Non-U.S. Developed Equity are preferred over US stocks because they are relatively cheaper and likely to benefit from US dollar weakness should the Fed become less hawkish.
  • Emerging Markets Equities could rally if there is significant stimulus from China, the Fed slows the pace of tightening, energy prices fall and the US dollar weakens. For now, a neutral stance is warranted.
  • High performance and prime credit begin to show better value with spreads above their long-term averages. Spreads will remain under upward pressure if the likelihood of a US recession increases and the Russia/Ukraine conflict escalates. High yield and investment grade should perform well if the Fed becomes less hawkish and a soft landing for the economy becomes likely. “We have a neutral outlook on credit markets for now, but we can see the case to turn more positive if a US recession becomes less likely,” Pease said.
  • State bond valuations improved after yields rose. According to the team, US bonds now offer good value, although Japanese, German and UK bonds are still moderately expensive. “A positive for government bonds is that markets have fully priced in the hawkish outlook for most central banks, and that should limit the extent of any further selling,” Pease said.
  • Real goods: Global listed infrastructure (GLI) has been one of the best performing asset classes so far this year, having benefited from exposure to energy, while real estate investment trusts have lost more than 20% %. Both should benefit if hostilities between Russia and Ukraine subside and inflation fears persist, although GLI should return some of the energy infrastructure gains. Commodities were the best performing asset class and the only one to post a positive return. Energy and agricultural prices soared following the Russian-Ukrainian conflict. The team expects some of these gains to be reversed if hostilities subside. One of the risks for commodity markets is that the Chinese economy continues to slow. Overall, the team believes that the case for commodity exposure is still positive, but weaker growth due to tighter central bank policy will dampen demand.
  • The American dollars has made gains this year thanks to the ferocity of the Fed and the call for safe haven during the Russian-Ukrainian conflict. The team believes it should weaken if hostilities abate and lower inflation later in the year leads to less Fed tightening than markets currently expect. The main beneficiaries are likely to be the eurowhich has become more undervalued, and the japanese yenwhich weakened due to commodity price inflation and growth concerns in China.

For more information, please consult the team Global Market Outlook 2022 – Third Quarter Update

About Russell Investments

Russell Investments is one of the world’s leading investment solutions companies offering a wide range of investment capabilities to institutional investors, financial intermediaries and individual investors worldwide. Building on an 86-year heritage of continuous innovation to deliver exceptional value to its clients, Russell Investments works every day to improve the financial security of its clients. The company has $326.3 billion in assets under management (as of 03/31/2021) for clients in 32 countries. Headquartered in Seattle, Washington, Russell Investments has offices in 19 cities around the world, including New York, London, Toronto, Tokyo and Shanghai.

Forecasts represent predictions of market prices and/or volume patterns using variable analytical data. It is not representative of a stock market projection, or of any specific investment.


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