Few people could have predicted the current economic scenario. Russia invaded Ukraine and cross-sanctions triggered the commodity and energy pricesthe website Global supply chain is still at its lowest, and the financial markets have been hit by the euro crisis. massive sale of stocks and bondsamong many other factors. Consumer confidence and spending have also weakened, as have corporate revenues and profits. In the meantime, central banks have intensified and tightened their policies in order to achieve tackling runaway inflation.
But is it possible to temper inflation without jeopardize economic growth? Central banks, such as the US Federal Reserve (Fed) and the European Central Bank (ECB), strive to achieve this goal by assuring that “there are means, but no guarantees” and warning that the process of controlling inflation “will be painful”. “The economy can resist monetary policy moves,” he acknowledged. Jerome PowellFed Chairman Jerome Powell at the ECB forum in Sintra.
In contrast, Allianz Global Investors takes a different view from Powell and believes that the economy will slow down significantlywhile noting that the likelihood of a recession increases. in the world’s largest economy, while the risks are lower in the rest of the world. “While we don’t expect 1970s-style ‘stagflation’ – a toxic mix of slow growth and recessions coupled with double-digit inflation rates – recession risks increase, we expect inflation to continue to surprise on the upside.“, they acknowledge.
Thus, they point out that all 3 year-on-year inflation rates are “likely” to peak by the end of the year, provided we don’t experience another energy price shock. Generally, it will take a long time, at least three to five years, for inflation to fall back to 2%. objective of central banks. “We do not expect central banks, particularly the Fed, to slow down or even halt the announced normalization of monetary policy. We rather think that will continue to raise interest rates and shrink their balance sheets,” says Allianz GI, whose experts also warn that investors “shouldn’t be surprised if markets price in monetary tightening.”
Virginie Maisonneuve, Global CIO of equities at Allianz GI, underlines that “we are in an atypical moment” since we are witnessing the withdrawal of quantitative easing and the establishment of a risk management system. rate hikes in a slowing worldno growth. “Global trade, as a share of GDP, could decline further, under pressure from a strong US dollar and the difficulty in sourcing goods,” she said.
Maisonneuve also points out that the likelihood of a sharp and synchronized global economic slowdown is supported by data from various indicators such as “M2, high oil prices, falling manufacturing indices, rising interest rates and reversal of the economic support measures implemented at the height of the pandemic”. The impact of slowing growth on corporate margins and earnings has yet to be felt at many companies, and while valuations have already adjusted significantly, a future “income recession” remains possible.So what is the way forward?
Inflection point for equity markets could come, says Allianz GI when forecasts for US interest rate hikes change. and fall to 25 basis points or even zero. they.
With this in mind, Allianz GI believes that. investors could benefit from a diversified portfolio. around quality stocks offering good dividends; quality growth stocks with strong balance sheets and rebalanced valuations; energy and food security; and “impact innovation” values such as artificial intelligence or cybersecurity. In addition, it is also interesting to consider the shares of Chinese companies, since the Asian giant’s GDP growth is “significantly higher than that of other major economies in the world” (around 5%) and it is an economy less exposed to the negative effects of a strong US dollar.
Allianz GI notes that it expects the main market risk for 2022 to be the ability of major central banks to control inflation without leading to a “steeper than expected” global recession. “So far, core government bond yield curves have remained flat, indicating that, although we are not in a recession, the market thinks we may be at the end of a very short economic cycle.“, says Franck Dixmier, global CIO for fixed income of the German firm.
He emphasizes that they expect “some short-term volatility” in bond yields.but indicates that we are at an inflection point for the dynamics of growth and inflation. Whereas it’s still early for central banks to soften their stanceDixmier expects an improvement towards the end of the year when downside risks to growth accelerate and the bond market “starts to reassess the magnitude of rate hikes in this cycle”.
Thus, it indicates that The most attractive sovereign bonds are those whose interest rates have risen sharply.The most attractive sovereign bonds are those whose interest rates have risen sharply, as downside risks “will become more evident in the coming months”, as in the case of the United States, Australia, New Zealand and Canada. Peripheral Eurozone bonds are not in such a favorable position, as the tightening of the ECB’s stance suggests further widening of spreads. When it comes to emerging markets, “selectivity is key,” while among high-rated bonds, downside risks to growth “support a defensive stance.”
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