#Podcast — 04.07.2022

With the dreaded “R” word appearing, bring quality and protection to portfolios

Prashant Bhayani, Chief Investment Officer, Asia

Connect every Monday morning to stay updated on what happened in the global and Asian markets last week and what to expect next.

With market volatility to stay high and recession risks rising, the dreaded “R” word the focus of the market has shifted as predicted in earlier pod-casts from inflation to growth fears.


  • In fact, the US first quarter GDP was negative for technical reasons around inventories and reduced exports. Since, then consumption has started to be impacted by higher rates and the current Atlanta FED GDPNow has a figure of -2.1% GDP for the second quarter. In addition, lead indicators, ISM new orders on Friday, fell below 50, reflect an intensification of the downturn. However, the “R” word or recession is also now more widely accepted. Remember the Federal reserve can only bring down inflation by affecting demand, they cannot fix supply chain issues. They can’t print a barrel of oil.


  • On the other hand lower demand, this bodes well for the fight against inflation, for example, Friday’s PCE was slightly below forecast. Demand is slowing for homes with mortgage rates of 6%. Inventory levels at retailers are high as demand for durable goods falls. Nevertheless, earnings estimates are likely still too high at +8% for the S&P 500, +4% for Euro Stoxx as sell-side analysts traditionally wait for company warnings.  Pre-announcements (to repeat again), will accelerate into q2 earnings which begin in mid-July.  The good news we are already pricing in a slowdown (average of -20%), not a recession (average sell-off of -41%). Keep in mind, larger sell-offs in recession often due to systemic issues – GFC 2008 for example. There aren’t any signs of that currently. Finally, China equities a notable exception with large earnings downgrades and much further in the economic cycle with easing policy. Continue to favour China A-shares which were up in June by +9%, while developed market equities down by high single digits in June.


These uncertainties are already reflected in our asset class views. However, investors have to also be careful of holding too much cash with inflation running +8% in US and Europe, which offers negative real returns, investors should consider bringing quality & protection to their portfolios


Hence, where else can you allocate in this challenging environment?


· Alternatives: Overweight - Important to build satellite allocations like private equity in order to diversify and lower overall portfolio volatility.

Private equity and real estate, Macro hedge fund and distressed strategies.



  • Lower correlation with traditional asset classes
  • Benefit from market dislocation
  • Enhanced long-term portfolio risk-adjusted return
  • Monetise the volatility as strategies invest across the cycle taking advantage of downturns


· Fixed-Income:

Recently upgraded from negative to neutral on government bonds recently after the largest yield sell-off since the 1970s, and Treasury yields could be already showing some early signs of peaking as the market shifts to growth fears as predicted in earlier podcasts. We favour the shorter-end of the curve.


-The prospect of holding a higher quality Treasury and investment grade credit to maturity, with low probability of default and hence less spread widening as the economy slows is becoming more appealing. The best indicator of future returns in fixed-income are historically current level of yields.


· Equities:

Overall remain neutral global equities (downgraded from positive since February early versus consensus). Stay selective and defensive. In the next quarter, we will get more data to the extent of any harder landing or recession. Opportunities will develop for patient investors.


Continue to favour quality stocks with pricing power and sustainable dividend growth and yield. These stocks have had much more modest declines than the market year-to-date.

  • Higher quality stocks that can deliver dividend growth multi-year growth in dividends over time outperform over the long run with lower volatility.
  • In an inflationary environment they can raise prices and have higher margins on average, resulting in outperformance.
  • Tapping into funds with quality stock underlying is one of the ways to bring quality and protection to a portfolio.