The American economy it is less vulnerable to these factors and, therefore, will intensify its inflationary dissociation from the rest of the world.
Even if the Fed can’t afford to be patient, the start of monetary normalization will entail new risks for financial markets, in light of the demanding valuations of national assets.
The european economy It is suffering from the increase in its energy import bill and its dependence on the supply chains of the global manufacturing sector, which continue to be affected by the pandemic. However, unlike the US, it will benefit from the positive budget boost associated with the NGEU plan.
In light of the ongoing adjustment in its real estate sector, China continues to need to export at a strong pace to maintain adequate GDP growth. Thus, Beijing will continue to slow the appreciation of the yuan by accumulating assets denominated in foreign currency. These assets will be largely recycled in the US Treasury bond market, hampering the Fed’s monetary normalization efforts. China will be under pressure from the US to implement a more far-reaching stimulus policy in the US. course of 2022.
Allocation and investment strategy
- In equities, we focus on long-term growth companies with good visibility, that is, they are not overly reliant on the business cycle and are able to pass on cost-induced inflation without downsizing.
- When it comes to fixed income, we selectively seek bonds from companies with attractive yields whose business models have not been severely affected. This is a necessary feature in a context of abundant liquidity and few pricing mechanisms.
- For their part, emerging markets offer niches of value (in both fixed income and equity markets) after having suffered from the orthodox policies applied in China, as well as from inflation and the prospects of normalization of US monetary policy .
We have gone from the situation of “Infinite quantitative relaxation” and “lower rates for longer” from a year ago to another of rapid and widespread interest rate hikes on a global scale. The different economic situation in the different economic blocks requires applying heterogeneous approaches.
Investors could be assuming a high degree of credit risk in exchange for a real return close to 0%. This abundant liquidity, coupled with an environment of such severe financial repression, means that the pricing mechanism does not work as it has in the past.. The resulting inefficiencies are positive for active management professionals.
In such a context, in which inflation could last longer as the economic cycle progresses, our risk management tools focus on the following areas:
- Active management of exposure to well-rated public debt due to the volatility of interest rates generated by inflation and fears associated with the level of indebtedness; low bond yields are not enough to offset this volatility and markets are particularly prone to price adjustments both higher and lower,
- Cash and short-term instruments seem the most suitable instruments to weather episodes of volatility and
- The dollar, thanks to its dynamics and status as a safe haven.
Source From: Ambito
