Syz Private Banking lowered its equity weighting from cautious to “reluctant” as it believes a sharp reduction in European markets is warranted amid “enormous uncertainty” created by the war in Ukraine.
Adrien Pichoud, chief economist at Syz, said the group had gradually reduced its exposure to equities and credit over the past few months based not only on fundamental and technical indicators, but also on balancing systemic risks. .
“As a further step in this process of de-risking, we are downgrading our view on equities another notch from cautious to reluctant,” he said. “We have chosen to sit on the sidelines and wait for more visibility, geopolitical, economic and corporate earnings outlook.”
Given that eurozone equities are the most exposed to the crisis, Pichoud said they have moved from a positive stance to a strong reluctance, while the UK and Swiss markets have moved from positive to cautious and that Japan moved from preferential to positive status.
“The weight of evidence is getting more and more negative,” Pichoud said. “Our ‘baseline’ scenario for 2022 is adjusted towards a lower GDP growth rate than originally projected and higher inflation.”
As global GDP is expected to grow roughly in line with the long-term trend, Pichoud said Syz does not anticipate a stagflation scenario at this point.
He added that unlike previous market or macroeconomic shocks, unless the crisis worsens significantly, central banks should not provide decisive support to the markets.
“Stock markets are getting cheaper but earnings forecasts have not yet been adjusted by consensus,” he said. “Our technical market indicators paint a mixed picture: Sentiment is increasingly oversold, but the long-term uptrend is now in danger of being broken.”
On the fixed income side, Syz remains cautious on rates and has maintained a position not inclined towards credit spreads.
“High yield and lower quality bonds are likely to continue to suffer from declining liquidity, rising interest rates and tight valuations,” Pichoud said.
“We are downgrading subordinated debt and emerging market bonds (hard and local currencies) from positive to cautious given the uncertainties and likely downgrades to the European and global growth outlook,” he added.
While remaining cautious on commodities in general, Syz raised its exposure to gold from positive status to preferred status.
“The asset class remains highly volatile and geopolitically determined,” Pichoud said. “We therefore favor exposure to the asset class through commodity-sensitive stocks rather than through pure-players.”
“The yellow metal is one of the few remaining portfolio diversifiers,” he added. “It benefits from lower real bond yields, geopolitical uncertainty and tight supply.”