It was just a short while ago that the global economy was returning toward normality: The fourth COVID wave seemed to be gradually receding, disruptions in the supply chains were subsiding, and, with inflation gradually easing, continued strong growth was expected. Now that Russia has invaded Ukraine, new burdens are arising: “There is a threat of significant weakening of the global economy with high inflation risks – keyword stagflation – up to a recession even”, Gerlinger pointed out.

“Due to the war in Ukraine and associated effects, we expect continued uncertainty on the stock markets over the next three months”, Gerlinger highlighted. Europe is more affected than other regions. Due to its proximity to Russia and strong economic interdependencies, the continent is suffering greatly from rising energy and commodity prices. Economic damage is expected to be most severe in Europe. “We are reducing Europe from overweight to underweight”, Gerlinger concluded.

Within Europe, the UK equity market, which had lagged significantly in recent years, remains attractive. Due to its heavy index concentration – banks, healthcare and commodities – major opportunities are now even arising. Banks are benefiting from rising interest rates. Healthcare is a defensive and non-cyclical sector, offering opportunities to catch up. And as far as commodities are concerned, the UK equity market now has a higher commodity proxy than emerging markets. “As a result, we will now slightly overweight UK equities”, Gerlinger explained.

The United States, in turn, is far removed from the war, and its economy is likely to suffer less from the conflict than Europe’s economy. In H1/2022, the US economy should continue to experience sufficient positive tailwind. Corporate profits continue to show a fairly stable upward trend for the most part. Although the Fed approved a first interest rate hike in March and sees more ahead, these steps should have been largely factored into share prices by now. Even growth stocks, which had suffered significantly from the rise in yields in recent months, had stabilised recently. “Overall”, Gerlinger summarised, “US equities remain to trade at high values by comparison. Nonetheless, we continue to consider them attractive, not least against the backdrop of sustained positive corporate data and encouraging earnings growth.”

The emerging markets are also less affected by the war in Ukraine. While Russia is expected to experience a sharp recession, the country plays a minor role in the MSCI-EM emerging markets index at a weighting of some three per cent. In the last few weeks, emerging markets have stabilised significantly and have recently outperformed due to their commodity proxy. “We expect at least stable commodity prices and are increasing our weighting in emerging markets to neutral”, Gerlinger said. “Due to the improved economic situation in Asia and the commodity-heavy nature of South America, we rate these two regions as attractive.”

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