Source: Pictet Barometer

After an eye-watering year so far, and another 9% fall in global equities in September, risk appetites are at record lows. Those hoping for a rebound shouldn’t overlook how consumers are tightening spending, banks are tightening lending and companies are delaying their spending plans. Industrials and real estate are especially vulnerable to the downbeat sentiment and higher financing costs.

There is a silver lining. Bonds – US Treasuries particularly – are starting to look attractive, and not just for their defensive qualities if there is another leg down. Treasury yields have touched 4% - the highest for a decade – while US inflation has peaked and US economic growth is decelerating. The picture is gloomier in Europe, which is grappling with rising inflation, energy hikes and an ECB behind the curve. Similarly high yield company bonds of whatever stripe are still vulnerable.

We move UK equities from overweight to neutral but see much-shorted sterling as nearing the bottom.

The global economic outlook is darkening again as tighter monetary policy around the world and surging energy prices continue to undermine consumer confidence and corporate earnings.

Major economies are flirting with recession. Europe is feeling the chill more than most other regions as the soaring cost of living and energy shortages force consumers to tighten their belts, banks to slow lending and companies to delay capital spending plans.

All of this augurs badly for corporate earnings in the coming months, which is why we maintain our underweight position in equities.

We’re unlikely to change this stance until we see stabilisation in corporate earnings revisions, a steeper yield curve and a further cheapening of cyclical stocks. Some areas of the bond market are beginning to look attractive, however, as yields are climbing to levels that are increasingly at odds with fundamentals. We have consequently raised our exposure to bonds.

Global asset classes

With the global economy weakening, we retain our underweight on stocks; we upgrade bonds to overweight as inflationary pressures appear to have peaked.

Equity regions and sectors

We increase the defensive tilt of our stock allocation by downgrading UK stocks and reducing exposure to industrials and real estate.

Fixed income and currency

We continue to prefer US Treasuries to euro zone sovereign debt.