“Portfolio liquidity will be essential, as overall liquidity at the macroeconomic level is expected to gradually dry up,” warns Monica Defend, director of the Amundi Institute.
- Stagflation risks are rising, with real growth below potential and inflation above central bank targets
- Geographic risks are back amid growing pressures to de-globalize, exacerbated by the Ukraine crisis
- Full monetary normalization is unlikely
- In this complex environment, resilience and balance will be the keys to asset allocation.
Investors will face a more fragmented environment characterized by slowing growth, accelerating inflation and growing divergence between regions and sectors in which the mix between monetary and fiscal policy will be decisive, according to the outlook for Amundi’s investment for the second half. In this increasingly complex context where international trade is no longer the main engine of global growth, investors will benefit from seeking resilience and trying to exploit the opportunities that could arise from the desynchronization of economic cycles and divergent trajectories of support policies.
The risks of stagflation are growing
Stagflation risks appear to be widespread, with real growth below potential and inflation still above central bank targets. However, although a soft landing for the US economy seems possible, the eurozone looks much more fragile as it is particularly hard hit by rising energy prices, and Chinese GDP growth across the expected to be below 4% due to COVID restrictions. On the side of emerging markets, countries with significant fiscal leeway, as well as commodity exporters such as Brazil, South Africa and Indonesia are expected to perform better than the others.
Inflation has probably peaked, but price pressures are expected to continue due to bottlenecks in supply chains, high energy and food prices and rising wages in United States, which should put an end to the period of extremely low or even negative interest rates observed over the past ten years. However, according to Amundi, a complete normalization of monetary policies is not on the agenda. Central banks are trying to balance the need to contain inflation with the need to preserve growth, and should probably adopt a “benevolent neglect” of inflation as part of this. In this context, the evolution of the mix between monetary policy and budgetary policy and the attitude of the various central banks in the face of new budgetary support measures will play a key role: while the United States has almost no room for maneuver budget ahead of the mid-term elections in November, Amundi is anticipating targeted easing measures in China.
Implications for investors
In an environment of rising inflation and high volatility, slowing growth and reduced global liquidity, investors should remain cautious in their risk management, and would benefit from seeking resilient assets and sources of returns real positive, while trying to take advantage of the differences between regions and sectors induced by the desynchronization of economic cycles.
After the sharp repricing of assets in the first half of the year, the relative attractiveness of equities versus bonds has eroded and a more balanced allocation is now appropriate. As far as equity markets are concerned, undervalued, high-dividend paying stocks should be a good fit, given that dividends are a stable component of performance when inflation is high. US equities appear to offer more resilience than European equities despite high valuations, while Chinese equities, whose prices are already pricing in an economic slowdown and earnings downgrade, could hold upside surprises.
In bonds, investors should take a more duration-neutral tactical approach and bet on monetary policy divergences, as well as inflation-linked and floating-rate securities to protect against inflation. In the credit segment, Amundi favors investment grade securities from developed markets and high-yield bonds from emerging markets. Finally, greater volatility in correlations between asset classes in an inflationary environment will require investors to seek additional diversification in commodities, currency strategies, particularly those that favor commodity exporter currencies, and low-correlation alternative strategies with stocks and bonds, like real assets. In this area, Amundi favors real estate and variable rate private debt.
Vincent Mortier, Chief Investment Officer of Amundi, says: “The era of extremely low or even negative interest rates is over. This context will be conducive to cleaning up excesses in market segments that thrive in times of abundant liquidity – Spac, cryptocurrencies, very high growth equities – and will once again focus investors’ attention on fundamentals, the indebtedness of businesses and profits. Geopolitical uncertainties and the changing mix between fiscal and monetary policy will continue to keep volatility high overall.”
Monica Defend, Director of the Amundi Institute, adds: “In this complex environment, investors will benefit from looking for the resilience and likely opportunities that will arise from a desynchronized economic cycle and from the different paths of fiscal and monetary easing. Portfolio liquidity will be key, as aggregate liquidity at the macro level is expected to gradually dry up.”