Syz Private Banking has downgraded its equity weighting from cautious to ‘disinclination’ as it believes a clear reduction in European markets is warranted in a context of the “huge uncertainty” created by war in Ukraine.
Adrien Pichoud, chief economist at Syz, said the group has been gradually reducing its equity and credit exposure over the past few months based not only not on fundamental and technical indicators, but also on systemic risk balancing.
“As a further step this de-risking process, we are downgrading our equity view by another notch, from cautious to disinclination,” he said. “We chose to sit on the sideline and wait for more visibility, on the geopolitical, economic and corporate earnings outlook.”
Given that eurozone equities are most exposed to the crisis, Pichoud said they have moved from a positive stance to strong disinclination, while UK and Switzerland markets have downgraded from positive to cautious and Japan has shifted from preference status to positive.
“The weight of the evidence is turning increasingly negative,” said Pichoud. “Our ‘core’ scenario for 2022 is adjusted toward a lower GDP growth rate than initially anticipated and higher inflation.”
Stagflation
As global GDP is expected to grow roughly in-line with long-term trend, Pichoud said that Syz does not anticipate a stagflation scenario at this stage.
He added that unlike previous market or macro shocks, unless the crisis deepens significantly, central banks are not expected to provide decisive support to markets.
“Equity markets are getting cheaper but earnings forecasts have not been adjusted by consensus yet,” he said. “Our market technical indicators provide a mixed picture: sentiment is getting more oversold but the long-term bull trend is now at risk of being broken.”
On the fixed income side, Syz remains cautious on rates and has maintained a disinclination stance on credit spreads.
“High yield and lower quality investment grade bonds should continue to suffer from declining liquidity, rising interest rates and tight valuations,” said Pichoud.
“We are downgrading subordinated debt and emerging markets bonds (both hard and local currencies) from positive to cautious given uncertainties and likely downward revisions to the European and global growth outlook,” he added.
Gold
While remaining cautious on commodities in general, Syz has upgraded its gold exposure from positive to preference status.
“The asset class remains very volatile and geopolitically driven,” said Pichoud. “We thus favour gaining exposure to the asset class through commodities-sensitive stocks rather than pure plays.”
“The yellow metal is one of the few portfolio diversifiers remaining,” he added. “It benefits from lower real bond yields, geopolitical uncertainty and tight supply.”
