Highlights:

• Despite the recent risk rebound, headwinds are likely to prevail short term: lingering risks of a war escalation and sanctions are augmented by tougher central banks and increased signs of slowdown. Thus, we decreased the equity exposure to slight underweight (UW), reducing Value and sector cyclicality vs. more defensive Growth names.
•  Short term, we prefer US and UK vs. EMU despite higher US valuations. EMU is more cyclical, exposed to the Ukraine crisis and more dependent on energy imports. Longer term, a scope remains to be diversified into US equities.
• Our base scenario of a slowdown – not a global recession – induces us to refrain from endorsing a strong UW on equities. Indeed, even with flat earnings growth in 2022 and lower-than-average PEs, equities may render mid-digit positive returns over 12 months (+5%).
• Furthermore, the current adjusted earnings yield gap vs. real yields is attractive, and so is the huge gap in cash flow vs Capex. Historically equity returns, while reduced, also tend to outperform bonds in periods of high inflation.

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