Taking stock at the midpoint

• The decisions taken by central banks last week generally were in line with our expectations, as expressed in our Mid-Year Outlook. They did not catch markets by surprise either, as equities continued to rally, bond yields didn’t spike, and the USD weakened, signalling that it was mostly in line with investors’ expectations. 
  
  
• In the US, the Federal Reserve (Fed) held rates at 5.25% with US inflation now standing at 4% (compared to over 9% almost a year ago). While the pause from the Fed was widely expected, it surprisingly signalled that up to two extra rate increases might be needed. That said, we continue to think the Fed is close to the peak in interest rates.
  
  
• In the Eurozone, the European Central Bank (ECB) didn’t follow the Fed’s lead. Instead, it raised interest rates by 25 bps, bringing the main refinancing rate to 4% (compared to 0% a year ago). The divergence from the Fed supported the euro. We expect the ECB to keep the door open for more rate increases this summer as Eurozone inflation peaked later than the US and so far, more tentatively. But, beyond the summer, we believe the ECB will likely consider pausing rates too.
  
  
• In contrast (but as expected), the People’s Bank of China continued to support the economy by cutting one of its policy rates, the one-year medium-term lending facility rate, by 10 bps to 2.65%. It takes time for an economy to return to normal following a strict and lengthy lockdown (as has been the case in Japan, which is now finally rebounding), and we expect China will likely continue to stimulate activity following its reopening. We believe that better growth prospects relative to the West, low inflation, policy support and attractive valuations should support Asia-Pacific assets including Japan, which rebounded last week (equities and currency). 
  
  
• This week, investors turn to the UK where inflation is expected to fall (but modestly and from a high level). As inflation will almost certainly still be high compared to the Bank of England’s 2% target, we expect it to continue raising interest rates and could be the last major central bank to pause: this week, it should raise the key policy rate by 25 bps to 4.75%.

Here’s how we’re positioned in our flagship portfolios: 

• Given the above market backdrop, our flagship portfolios continued to generate positive returns, extending the gains experienced so far this year. Our strategic positioning and equity selection continue to be tailwinds, whilst our more cautious near-term views and diversifying fund positions (US defensive value) have been headwinds.
• Taken together, we believe our overall asset allocation is a sensible combination to cushion possible downside risks in challenging markets: our strategic exposures do capture the rising trend in equity markets; our tactical tilts moderate some of the upside but also act as a mitigating factor should markets turn.
• In recent weeks, we have discussed our defensive near-term asset allocation positioning which remains focused on quality within equities and fixed income.
• In terms of equity strategy, we continue to take profits in strongly performing segments where valuations appear stretched, while reallocating to more defensive parts of the market such as low-volatility European stocks.
• Elsewhere, we are keeping our position in Asia-Pacific equities including Japan, which should benefit from the trends mentioned in our Markets section above.

Past performance is not a reliable indicator of future returns.