A new set of uncertainties has emerged, especially bearing in mind the staggering impact of COVID-19 on the economy and politics.
Historic monetary and fiscal policy actions during the pandemic reignited inflation, and Russia’s invasion of Ukraine exacerbated these inflationary pressures and slowed economic growth, causing commodity/energy prices to skyrocket. Markets are grappling with this environment as some of the major central banks tighten policy. We analyze what all this could mean for investors in the second half of 2022 and beyond.
Our central scenario and other possible scenarios
Our central scenario projects growth to slow in the near term due to high commodity prices and a spike in inflation in mid-2022, although a return to more normal levels in 2023. We also envisage two other scenarios. First, if Russia cuts energy supplies to Europe, we expect higher inflation, lower growth, and less tightening of monetary policy worldwide. Second, if tensions with Russia ease, inflation may fall, growth will increase, and monetary policy will become more aggressive.
Where are we in the cycle?
Inflation is currently well above the Federal Reserve’s “comfort zone.” While markets expect high inflation in the near term, long-term forecasts remain fairly unchanged. We expect growth in major advanced economies to slow for the rest of 2022, although we expect growth to return to trend rates as economies digest current geopolitical tensions.
In what direction is the world economy developing?
We believe that economies will continue to decelerate from their high post-pandemic growth rates and approach trend rates in 2023 – albeit with formidable challenges. We expect the US and Eurozone to benefit from the re-opening of the post-Omicron wave in the second half of 2022, sliding towards trend growth rates throughout the year. With China’s growth facing short-term challenges due to COVID, we expect policy-driven acceleration to resume by the end of 2022.
What are the policy implications?
Rapid tightening is expected from the Federal Reserve and the Bank of England to control inflation. We expect the Fed rate to hover between 2.50-3 during the first quarter of 2023, leading to neutral or slightly accommodative policy and a flattening of the yield curve by the end of the month. We expect growth to slow in China for the rest of 2022 as the impact of COVID subsides and policy support kicks in.
What are the implications for asset allocation?
What does this mean for investors’ portfolios? Read a brief description of our scenarios and scroll down to the charts below to see which assets we favor among bonds, stocks, commodities and alternatives.
We prefer to de-risk by slightly overweighting equities while biasing towards defensive sectors. Overall, we expect higher volatility and greater convergence of returns across all asset classes.
To view a set of graphs illustrating the details of our baseline scenario and our alternative scenarios, click here.
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The value of investments and any income will fluctuate (this may be partly the result of fluctuations in exchange rates) and investors may not get back the full amount invested.
Important information
This communication is marketing material and not a recommendation to buy or sell any particular asset class, security or strategy. As such, regulatory requirements requiring an unbiased investment recommendation/investment strategy do not apply, nor do any pre-publication trading bans.
If opinions are expressed by individuals or companies, they are based on current market conditions, may differ from those of other investment professionals and are subject to change without notice.EMEA2198809/2022