Events over the summer seem to confirm inflation has peaked in the United States, but price pressures will only subside gradually. In Europe, fresh jumps in energy and food costs continue to power inflation and raise doubts about whether it is likely to decline short term. All of which encouraged central bankers, gathered at the Jackson Hole symposium in the United States, to reaffirm the priority of the fight against inflation, “whatever it takes” in terms of economic impact.
This latest trailed tightening of monetary policy poses an additional risk of recession for developed economies. True, several support factors are still in play – buoyant labour markets and plentiful savings – but activity should nonetheless slow sharply in coming quarters. In the United States, even without considering monetary policy, high inflation and restrictive budgetary policy are already damping demand. In the Eurozone, household purchasing power is being particularly hard hit because of the feeble growth in salaries. New pressures on gas and electricity prices raise a real risk that some industries will have to cut production, triggering a sharp recession. In further bad news for the global economy, China’s outlook is also weakening, as the government sticks to its zero-Covid policy and the real estate market continues to fracture.
New pressures on gas and electricity prices raise a real risk that some industries will have to cut production, triggering a sharp recession.
We hold to our prudent approach to equity markets, remaining Underweight with a bias to defensive regions and sectors. We retain our Overweight to the UK given its defensiveness, inflation sensitivity and attractive valuations.
At the same time, we remain cautious on bond markets, which have yet to find their footing in extremely volatile conditions. Yields may now look tempting, particularly real yields, but another rate hike would knock performance back again.
Finally, in most strategies we are introducing an allocation to real assets which benefit from steady income streams and hence reduced correlation to equity markets, adding further diversification and a degree of inflation protection.
We retain our Overweight to the UK given its defensiveness, inflation sensitivity and attractive valuations.
In accordance with the applicable regulation, we inform the reader that this material is qualified as a marketing document. CA25/H1/21 Unless otherwise specified, all statistics and figures in this report were taken from Bloomberg and Macrobond on 02/09/2022.
