Spring Outlook

Most Likely: Inflation gradually slows as rate rises continue. The UK flirts with recession amid persistently low consumer sentiment. Food inflation remains elevated and volatile, but energy costs fall. Recent trends continue as large companies protect their share price and earnings better than small and mid-sized companies and consumer- facing businesses will struggle. Overall, persistent inflation and higher interest rates weigh on global growth and lead to more volatility.

Worst Case: War in Ukraine causes food and grain prices to remain elevated. Rapid interest rate rises bring about a deep recession and stocks and bonds plummet as unemployment rises. This ends in the collapse of an unexpected area of the market leading to a run on the wider market. The UK should be relatively defensive given the lower valuations, but investors will struggle to find anywhere to hide.

Best Case: Central banks’ interest rate hikes prove successful and inflation begins to fall without causing a massive change to unemployment and GDP figures. From its low valuation base, the UK rebounds with greater magnitude than other markets. A reasonable agreement for Ukraine’s freedom cools food and commodity inflation. Smaller companies will stand to benefit the most from equity markets returning to sustained positive performance.

Most likely: The US Federal Reserve hikes again but cooling inflation and jitters in the banking sector convinces it to stop there. In the US, interest rate sensitive sectors like technology and communications benefit from the Fed signalling the peak in interest rates. Chinese reopening provides support for export sectors in Japan and Europe.

Worst case: The Russian offensive in Ukraine regains momentum. Global supply shortages return and energy and food prices hit new highs, adding to inflationary pressures. Simultaneously, a global banking crisis develops, causing more banks to need rescue packages. The central banks are caught between fighting inflation and stabilising the banking sector; global markets are spooked by the uncertainty.

Best case: The war in Ukraine ends, allowing commodities from Russia and Ukraine to flow freely. China’s recovery boosts the global economy and markets. Inflation cools rapidly and central banks are able to slow or halt interest rate hikes. Central banks restore confidence in the banking sector following the forced takeover of Credit Suisse. Faster economic growth boosts cyclical sectors such as industrials and consumer discretionary stocks. Technology stocks rise as the value of future earnings appears greater as inflation begins to recede.

Most Likely: The end of China’s Covid restrictions has been positive. Global inflation remains elevated, so countries and corporations with debt in dollars face pressure due to a strong US dollar. High inflation is a relative advantage for commodity-producing markets such as Brazil, but others such as India are exposed to higher food and energy prices.

Worst Case: China continues to experience significant headwinds from foreign regulation, domestic regulation and the struggling property market. Tensions between China and Taiwan result in a Chinese invasion. This would materially impact emerging markets, and has the potential to create a global economic shock. At present, we are considering this factor and although the magnitude of the risk is great, the probability of its occurrence is relatively low.

Best Case: The US Federal Reserve halts or even reverses some rate rises and this is extremely beneficial for emerging markets equities, due to the US dollar falling in value. The end of China’s strict zero-Covid policy produces a strong tailwind for it and its trading partners. The ‘nearshoring’ drive by the US, coupled with an unwavering reopening of the Chinese economy, should provide a continued support for Latin America.