Market Shocks Make Freshly Minted 2022 Playbooks Look Out of Date

Written by
Denitsa Tsekova
Written by

Denitsa Tsekova

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(Bloomberg) -- Money managers betting on a year-end rally to cap a blockbuster year got a big shock this week which also threw their plans for 2022 into disarray.

As a potentially disruptive virus variant darkens the economic outlook, market players are touting defensive buffers to cross-asset strategies just as hawkish signals from the Federal Reserve further undercut risk appetite.

HSBC Holdings Plc and Barings Investment Institute are among those recommending tried-and-trusted hedges including bonds and long dollar positions, while cooling on risky stocks and junk-rated corporate debt.

“This rising tide shifting all boats narrative that we've seen year to date, that is likely to reverse,” said Swetha Ramachandran, a fund manager at GAM Investment Management. “We will start to see much more polarization between companies that generate cash that are profitable today versus those that are promising jam tomorrow.”

That market divergence was on display this week as S&P 500 stocks with weak balance sheets fell at the fastest pace in a year versus those with the healthiest financial ratios, according to baskets compiled by Goldman Sachs Group Inc.

Still with dip buyers out in full force this week, few strategists see good reason to remain risk-off for long, and much remains unknown about the omicron risk.

“This is a wild card, but it's mostly a wild card for the near term,” said Mislav Matejka, an equity strategist at JPMorgan Chase & Co. “Even in a bad scenario, this could be a good entry points to buy into the first half of next year as the market repositions for the new redesigned vaccines upside.”

Here's a snapshot of views:

Agnes Belaisch, managing director and chief European strategist at Barings Investment Institute

Recommends long-dated government bonds as the Fed taper flattens the yield curve, quality equities including technology

“We've seen this month a return to safe haven bond investments because equities have underperformed. When you have a multi-asset strategy in your portfolio it's easier to play relative asset value and to protect yourself like this and to switch from equities to bonds -- that right now are providing some havens when the volatility is rising.”

Peter Chatwell, head of multi-asset strategy at Mizuho International

Recommends reduce exposure to equity and long duration credit exposure in the first half of next year

“Clearly there's some downside risks to growth. There's also further upside risks to inflation in the near-term. The outlook becomes less supportive of risk assets in the near-term.”

Max Kettner, multi-asset strategist at HSBC Holdings Plc

Recommends underweight positions on corporate junk bonds, equities and overweight on the dollar

“The first half of next year is going to be much tougher for risk assets. What we're advising clients to do is to underweight equities, underweight high-yields, being long on the dollar.”

Kevin Thozet, member of the investment committee, Carmignac

Recommends cash and the dollar to hedge volatility

“We are mainly focusing on visible growth companies with good visibility and have relatively low exposure to ‘reopening' or travel.”

Barnaby Martin, credit strategist at Bank of America Corp.

Euro-area domestic credits will get relative-value lift

“We don't see omicron changing the game. Vaccinations are likely to be the endgame still, we think, with governments appealing to the vaccine dividend to reopen economies.”