Key points:

• Recent data are consistent with the view that while global growth has downshifted in the second quarter, a recession is not imminent. Solid labour market and consumption data in the US, stability in the global manufacturing PMI and better data in China have likely helped support equity markets of late.
• However, looking further ahead we remain cautious on the outlook. Central banks are facing into a steep trade-off between inflation and growth and a number of leading indicators portend a further deceleration in growth. We think this outlook is consistent with our recent move towards a more defensive positioning in multi-asset portfolios.
• The RBA is the latest central bank to deliver a 50bp rate increase as it faces into stronger than expected inflationary pressures, above trend GDP growth and a very tight labour market. In our view, this week’s rate decision marks a significant shift in the RBA’s approach to policy normalisation. The market has responded to this development and is now priced for a cash rate of 3.1% by the end of the year.
• The ASX200 has significantly out-performed the S&P500 since the beginning of 2022. Our analysis suggests that almost all of this out-performance can be attributed to banks and miners. But a more hawkish RBA gives us reason to question the sustainability of this dynamic; it is possible the banks may struggle to out-perform until there is greater certainty around the contours of the RBA’s tightening cycle. And while the consensus already expects slower credit growth in the year ahead, recent data on mortgage approvals together with the RBA’s newly discovered sense of urgency suggest risks to this forecast lie to the downside.
• As such, we think it is prudent to adopt a more neutral stance on the outlook for domestic equities relative to international equities. For most of this year, we have articulated a marginal preference for the local market. Recent developments suggest it may be sensible to hold a more impartial view on the relative attractiveness of domestic vs. international equities.