MACRO OPINION 15
Laurent Gorgemans , CFA, Global Head of Investment Products at Nordea Asset Management:
Cool-down for the inflation
Milestone achieved: inflation is showing signs of easing. However, the battle central banks are fighting is not over yet, and a recession is looming. Hedging and flexible investment strategies are therefore in demand.
Finally, restrictive monetary policies around the globe, tighter financial conditions and lend- ing standards (following the recent turmoil in some banks) are starting to kick in and markets are experiencing the longed-for cool-down of inflation data. In particular, headline inflation is easing, thanks to declining natural gas costs. However, that does not mean that central banks’ fight against inflation is over. Instead, core infla- tion rates – stripping out more volatile items like food and energy – remain elevated. Financial conditions continue to tighten Latest economic readings have brought mixed sentiment. Some indicators are pointing to lower growth (such as jobless claims), while others are still firm, leading US government bond yields to be quite volatile recently on the back of debt ceil- ing negotiations. Central banks remain committed to inflation expectations to be around 2% and further hikes are still on the agenda. We might experience two quarters of negative growth in the US in 2023, which is, by definition, a recession. In Europe, we will probably see very low economic growth, according to consensus expectations. In this environment, the European Central Bank (ECB) will have to continue its rate hike in order to curb core inflation and, more importantly, dampen expectations of future inflation. In China, after the sessions held by the Nation- al People’s Congress and the Chinese People’s Consultative Conference, the pro-growth stance was again emphasised and monetary policy loos- ened. Inflation is well contained in this part of the world. The growth target for the Chinese Gross Domestic Product (GDP) was set at around 5%.
Temporary relief: the danger of overheating seems averted for the moment as global inflation figures are falling.
attractive today than they were in 2022. Bond yields, both government and credit bonds, seem interesting for some investors, given the bleaker economic outlook. In real terms, though, it only gets more challenging. In case we should experience a more pronounced economic downturn, covered bonds remain a safe choice. At the same time, companies that are offering stable and robust cash flows should also be able to navigate this environment well. Vola- tility is likely to remain high for the remainder of the year both in fixed income and equities, leaving the door open to solutions that have the flexibility in their investment strategy to adjust and that can exploit different directions of the financial markets.
What are the solutions for investors? Some segments of the financial markets are more
ISSUE 01.2023
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