- Slowing economic growth. Rapid central bank tightening appears to be pressuring all sectors and slowing economic growth broadly. We further anticipate rising unemployment and expect the resulting loss of consumption could accelerate a downturn.
- More fed hiking or rate cuts? In our view, the pace of central bank tightening will likely slow, but we may not have seen the last of hiking. Furthermore, we would be surprised to see rate cuts in the face of a modest recession this year
- We believe profits drive the credit cycle. Corporate profit margins should remain pressured with fading pricing power. (Despite declining profitability, however, less consumer price inflation is a positive.) We project both services and manufacturing industries to experience a material slowdown in demand over the next few quarters. With the global economy seemingly vulnerable, we do see risk of entering the downturn phase of the credit cycle.
- Equities challenged. We anticipate a modest contraction and believe the past six months’ equity market performance reflects an optimistic outlook for companies in a challenging macro environment. We currently favor US large caps, information technology and growth style equities and are cautious on financials overall and emerging markets as a region.