According to thought leaders at Invesco, the remainder of 2022 is likely to bring a substantial slowdown in growth for major developed economies; however, there are ways one can position their portfolio to be prepared.
“Major Western central banks such as the U.S. Federal Reserve (Fed) are attempting a delicate balancing act, trying to tighten monetary policy enough to cool the economy and lower inflation, but not tightening so much as to send their respective economies into recession. This task is admittedly growing increasingly difficult,” Kristina Hooper, chief global market strategist for Invesco, wrote= in “2022 Mid-Year Investment Outlook: Where do we go from here?”
Most Western developed economies are already showing signs of a substantial slowdown. The Purchasing Managers’ Index (PMI) for both the U.S. and eurozone experienced notable declines from May to June, according to Hooper. “We believe the odds of a recession are higher in the eurozone than the U.S., given high energy prices that are more difficult to control with monetary policy.”
While more aggressive tightening increases the odds of a recession in the U.S., Hooper said they still believe the Fed has the potential to execute a “soft landing.” Factors that should help include a tight labor market, with a high level of job openings that can be cut in lieu of some layoffs, as well as the Fed’s commitment to be data-dependent, according to Hooper.
“We believe a neutral risk stance relative to the benchmark is appropriate,” Hooper wrote. “Given that we anticipate a global slowdown, we expect modest positive returns with narrow dispersion in performance between fixed income and equities.”
In this environment, Hooper said they prefer a slight overweight to equities relative to fixed income, with equity exposure tilted to defensive sectors, and quality and low volatility stocks.
“We favor the U.S. over developed markets ex-U.S., but relatively equally weighted to both developed markets and emerging markets,” Hooper wrote. “Within fixed income, we prefer quality credit and are neutral on duration. Fixed rate investment grade and municipal bonds are specific areas of potential opportunity. Within alternatives, we prefer energy, value add real estate, and core plus infrastructure.”
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