Page 3 - ISQ UK_October 2017

JANUARY 2022

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same expected in the UK, albeit from a lower level, that the market right sport to describe the 2022 political scene. The perceived dys-
and economy will absorb like an expected bump in a bobsled run. function in both DC and Westminster has not stopped the economy
They key question is what rate boosts will come in 2023, as this will and financial markets from scoring in recent years. There have been
have an impact on 2022 sentiment. We expect the rate of economic scuffles between policymakers along the way, but they never let the
growth going downhill just enough to freeze inflationary pressures puck stop in meeting the needs of the economy and the people. In
and grant the Fed the power of flexibility. While some observers talk the US the unprecedented $6 trillion in fiscal stimulus to not rolling
of a potential yield curve inversion (where short-term rates move back the Trump-era tax cuts, both parties have achieved top-shelf
higher than longer-term rates), we think the Fed sled and the BoE’s agenda items that stimulated the economy and supported equities.
Bob will be driven conservatively, remaining patient and relatively In the UK Mr Sunak’s last budget was more about stimulating growth
accommodative. than paying for the last few years. US history suggests the incum-
bent party tends to lose seats in the House of Representatives in
Yields Will Swerve Between the Gates midterm elections, making gridlock the anticipated outcome. In the
UK Boris’s leadership is looking equally shaky. With politics in the
neutral zone, few major policy shifts should make it off the boards.
Downhill skiers reach impressive speeds when weaving through Market fans are likely to view this positively, as the economy has
gates on the mountainside. Although skiers are going faster and scored its share of goals and is no longer languishing in the penalty
faster, the US 10-year Treasury yield has failed to reach its previous box.
peak rate after each successive tightening cycle. This cycle will be
no different. Structural factors like government debt, demo- Equities’ Transition from Power and Speed
graphics, and globalisation trends should keep the 10-year Treasury to Targeted Precision
yield zig zagging within a tightly gated range, ending the year
around 1.9% in the US. The modest move higher is expected on To win in biathlon, athletes must ski fast and shoot straight – two
both sides of the Atlantic as the Fed and BoE remove their emer- very different skills. The equity market excelled during the speed
gency measure netting, making for a challenging run for fixed portion of the race, bullishly boosting equity valuations and
income returns. Despite this, bonds still play a critical role for inves- notching a record rebound in earnings growth along its way. Now,
tors who need to tuck away from equity risk. Periodic bouts of the market is transitioning to a period where precision and stead-
volatility could create opportunities in the corporate credit markets iness are needed. Investors must become expert marksmen,
as the macroeconomic backdrop remains positive, with low default aiming carefully at the right sectors and right companies. We have
rates and improving corporate earnings.
our sights set on more cyclical sectors, as their earnings should
benefit from above-trend economic growth. Just as Olympic offi-
The Democratic ‘Blue Wave’ is cials salt the course to turn slushy, slow snow into a super slick ice
Skating on Thin Ice track, the continuation of shareholder-friendly actions and a still
low interest rate environment will salt the course.

Given the rough-and-ready rhetoric, ice hockey seems to be the

*Financial forecasts should NOT be considered a guarantee of future performance or a guarantee of achieving overall financial objectives. Expressions of opinion are as of this
date and are subject to change. Past performance is not a guarantee or a predictor of future results.

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