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Equity Markets Moving Into More Dangerous Phase, SocGen Says

Equity Markets Moving Into More Dangerous Phase, SocGen Says

Markets are moving into a “more dangerous” period, warranting a reduced exposure to equities, according to Societe Generale SA strategists.

“We are entering a new phase of market cycles in which Fed tightening might become a strong headwind,” strategists led by Alain Bokobza wrote in a note dated Wednesday. “Inflation starts to look permanent and the inflation-to-wage spiral continues to whirl.”

The strategists have reduced the equities allocation in their multi-asset portfolio by seven percentage points to 42%, half of which remains in U.S. equities. Overall, dollar assets now represent 55% of the portfolio.

“The Fed and other central banks are entering a dangerous phase of accelerated rate increases which will force liquidity conditions to tighten,” Bokobza wrote. He sees portfolio de-risking as likely to become a core theme and recommends “quality” income equities with strong balance sheets. 

Equity Markets Moving Into More Dangerous Phase, SocGen Says

Global equities have dropped about 7% this year amid sticky inflation, more aggressive central bank policies, as well as Russia’s invasion of Ukraine. Risks to global growth have increased, with energy prices soaring after the U.S. and Europe hit Russia with tough economic sanctions. Other strategists including those at Barclays Plc and Morgan Stanley have also turned more negative on stocks recently.

The war in Ukraine has made building asset allocations more complicated, according to Bokobza, given that escalation and de-escalation are both equally possible. Strategically, he sees structural changes, with defense stocks likely to become an area of investment, while green deals and other long-term themes like hydrogen should have “a new run,” he said.

The strategist said he’s maintaining some exposure to China assets to benefit from a potential economic acceleration and has added a “bottom-fishing strategy” on the country’s equities. Some European trades also offer good entry points, he said.

“Tactically, we like catch-up trades, including European credit, European banks and euro-area dividends, as a lot of bad news is already priced into these assets,” Bokobza wrote.

©2022 Bloomberg L.P.