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Wednesday, October 5, 2022

“Profits will fall as consumption declines and dollar strengthens”

Evan Brown began his career in the financial markets in 2006 working for the New York Federal Reserve. He later moved to Morgan Stanley, where he co-led American Currency Strategy, and in January 2017 UBS AM . got included inManager of Swiss Bank, where he is now Head of Multi-Asset Strategy.

After the bond selloff this year, have yields reached a level that is attractive enough to re-enter?

Yes, we see bond sales as an opportunity to increase exposure to sovereign fixed income.

In this context, what kind of bonds do you find most interesting?

We think the US Sovereign and the German Bund will outperform the UK Gilt. The amount of fiscal support in the UK is shaping up to be much wider than in Europe. British consumption should be able to weather the energy price crisis better than European industry. The starting point of activity is much better in the UK than in Europe. And with the US market largely outpacing its forecast plan to cut interest rates for 2023, US Treasuries have become more attractive than gilts.

Do you expect the stock to fall further?

We expect equities to continue to experience volatility, but within a certain range. The Fed wants to tighten financial conditions, which limits growth in valuations (if they become too high, the Fed could hint at a higher final interest rate). Economic strength in the US, due to continued strong nominal wage growth, coupled with extremely depressing sentiment/equity position, is limiting the downside.

Do you see a change in the earnings growth prospects of listed companies in the coming months? Could forecasts start to fall?

The 12-month earnings forecast for the MSCI World Index has been slightly lower over the past three months, especially if commodity-linked sectors (energy and materials) are excluded. In our view, earnings forecasts should continue to come under downward pressure, as a result of contraction in the global consumer goods sector and the strengthening of the dollar.

Do you expect the stock market to fall further due to an increase in financing costs due to the rate hike?

Central bank tightening will continue to limit equity gains, as equity valuations are much higher than bond valuations, and slower economic activity is putting pressure on earnings estimates.

Are there any forex strategies that you find interesting right now?

We maintain a moderate positive bias against the US Dollar. In our opinion, two of the most damaging events for risk assets would be a global recession or a longer and more aggressive tightening campaign by the Federal Reserve. Either of these results would potentially support the dollar’s strength. Although we believe that the dollar remains expensive, there are historical examples of even more pronounced deviations from its theoretical value. We see opportunities in long positions in emerging currencies such as the Brazilian real, compared to more cyclical Asian currencies and G10 commodity exporters.

Commodities have been on a declining trend since May. Is this the first sign that we will see a decline in inflation in the near future?

This is already happening. Falling prices of raw materials, particularly oil and gasoline, have already contributed to a lower annual rate of general inflation.

Do you find it interesting to invest in commodities now?

We believe that the risk-return ratio of investments in commodities and commodity related assets is attractive. In our view, commodity downside risk is limited as compared to previous cycles due to tight supply in most of these assets. Furthermore, exposure to commodities remains highly attractive from an asset allocation standpoint in a high inflationary environment, allowing the relationship between equities and bonds to remain positive for an extended period. Since 1989, in months when both global stocks and long-term US bonds have fallen significantly, commodities have outperformed the traditional 60/40 portfolio by more than 3 percentage points.

Geopolitics is adding weight to the markets. Do you think this trend will continue? Which events do you think could lead to volatility in the markets?

Geopolitical events are likely to remain one of the main factors in the future of the market, as investors who were distracted by the Russian invasion may not want to make a similar mistake again. As far as possible development is concerned, we monitor the escalation of hostilities between Russia and Ukraine; October meeting of the Bank of Japan; If China unexpectedly moves away from zero COVID policies around the National Party Congress; cessation of withdrawal from the US Strategic Reserve Fund or the entry into force of additional sanctions from the European Union; a possible nuclear deal between Iran and major world powers; More aggressive sanctions on the supply of crude by OPEC+ and an unexpected victory for the Democratic Party in the US mid-term elections.

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World Nation News Desk
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