High inflation, tighter monetary policy, and new opportunities
Our macro view as of June 2022
Although inflation is showing the first signs of abating — more so in the USA than in the eurozone — we still expect inflation in both regions to remain at 5 to 6 per cent until the end of the year. Pressure on central banks, therefore, remains high. A tighter monetary policy, China’s lockdown, and the war in Ukraine are increasing the likelihood of a recession.
However, since the markets have already reacted very clearly to these events since the beginning of the year, we also see opportunities and are adjusting our portfolio.
How we position ourselves strategically: The monthly CIO Update analyzes the current market environment and reveals the background. It is presented by Sandrine Perret, Senior Economist, Fixed Income Strategist, and Michaela Huber, Economist.
New: government bonds positive, commodities neutral
The two most important Western central banks are drastically tightening their monetary policy. The ECB is halting its quantitative easing and has hinted at two interest rate changes to come; the days of negative interest rates in the eurozone may soon be over. The Federal Reserve in the USA will presumably “take action” and hike interest rates to close to 3 per cent by year-end.
This would be an additional burden on the world economy that is already suffering from China’s lockdown policy and the war in Ukraine. However, opportunities are also opening up in the current market environment since bonds and equities have strongly decreased in value since the beginning of the year. Prices may rise again particularly if there is not a recession and if China stimulates its economy more than expected.
Our opinion is that government bonds, which are currently quoted at very low prices, are the most secure haven in this kind of an environment. The situation began to stabilize in May, so we are upgrading these government bonds to positive.
On the other hand, we are downgrading commodities to neutral. Prices have recently moved sideways after strong gains, and there have been initial corrections for metals. We prefer to take some gains since we feel that a lot of risks are already priced in. We expect equities to stabilize after the steep price fall since we currently do not anticipate a recession before the end of the year–even if the probability of a recession, particularly for 2023, is increasing. We, therefore, anticipate opportunities in more defensive markets especially in Switzerland and the USA. We are also maintaining an overweight position in gold in order to hedge our portfolio.
