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Developed Markets Quarterly Outlook

November 2022*

Pivot or No Pivot, Stagflation Risks Remain

High inflation and slowing growth remain central themes. Recession risks are unlikely to abate going into the New Year without a sharp reacceleration in China (not a base case). Yet central banks are beginning to moderate the pace of rate hikes as they observe the ‘lagged effects’ of policy tightening. The medium-term path for rates will depend on how inflation expectations evolve.

Since the last Developed Market Quarterly Outlook, all equity markets have produced negative absolute returns. Emerging Markets (EM) were the most challenging region as investors have reassessed their strategic allocation to China equities. Sluggish growth, a potentially more ideological government, and deteriorating US-China relations contributed to this reassessment. Commodity-sensitive markets (e.g., Australia, Canada, and the UK) fell in line with the drop in industrial commodity prices. And Japanese equity underperformance (in USD terms) closely tracked the sharply falling Japanese Yen (-9% vs. USD over three months).

Inflation rates remain well above target across Developed Market (DM) economies, leading DM central banks to continue tightening policy. But forward guidance has started to signal a slowing pace of rate hikes as central bankers want to observe the lagged effects from rate changes earlier in the year. The pace of moderation and the resulting impact on long-term bond yields remains debatable. Market pricing for the Fed’s terminal rate rose following the most recent meeting, despite the FOMC opening the door to possibly slowing rate hikes from the 75bp hike pace in the most recent meetings. The evolving inflation outlook and labour market strength will help gauge central banks’ path into 2023.

The DM growth outlook continues to be revised lower by consensus forecasts. Recession risks are not a base case across all economies, but the risks are growing, and markets are pricing a higher probability of recession in 2023. The MSCI All Country World Index (ACWI) is -20% YTD, and the US 10y-2y curve has inverted. Global earning revisions remain negative, and this trend will likely persist next year. The 2023 consensus estimate for EPS growth is still a positive 5.1% yoy growth for the ACWI index. There thus remains considerable downside for earnings expectations in a recession scenario.

Equity valuations have corrected in response to a deteriorating global outlook. But the World/US P/E ratios are closer to historical averages now. Some markets are showing more value, like EM and Europe. But those valuation discounts are unlikely to shift without a positive shift to the global growth outlook. In other words, a recession scenario leaves further room for forward P/E multiples to fall.

Market Strategy: In our country allocation, we favour exposure to countries with the best cyclical prospects and the most attractive valuations. Since the last Quarterly Outlook, we made the following allocation changes:

Global Equity Allocation Breakdown


  Chg -2 -1 0 +1 +2
US -          
Canada -        
Eurozone          
Switzerland -          
UK          
Japan          
Australia          
EM -          

*This publication reflects asset performance up to 30 October, 2022, and macro events and data releases up to 7 November, 2022, unless indicated otherwise.

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The information contained herein is obtained from sources believed by City of London Investment Management Company Limited to be accurate and reliable. No responsibility can be accepted under any circumstances for errors of fact or omission. Any forward looking statements or forecasts are based on assumptions and actual results may vary from any such statements or forecasts.

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© 2022 City of London Investment Management Company Limited.
All rights reserved.

City of London Investment Management Company Limited (“CLIM”) is authorised and regulated for the conduct of investment business within the UK by the Financial Conduct Authority (FCA) and is registered as an Investment Advisor with the United States Securities and Exchange Commission (SEC). Registered in England and Wales No. 2851236. Registered Office: 77 Gracechurch Street, London, EC3V 0AS, England.

© 2022 City of London Investment Management Company Limited. All rights reserved.