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High inflation, rising rates and geopolitical risks: implications for investors
- US CPI surprised to the upside last week, hitting 7.5 per cent, the highest since 1982. Inflation will probably fall later, and less sharply than we previously expected, and we therefore raise our 2022 average inflation forecast to 6.1 per cent. Though our inflation forecast for 2023 is unchanged at 2.6 per cent, the Fed is forced to act more forcefully and we now expect a 0.5 per cent rate hike in March, followed by four more hikes of 0.25 per cent in May, June, September and December, and two hikes in 2023. The US economy should continue to grow strongly, but the rate hikes should somewhat dampen GDP growth, which we now see at 3.6 per cent in 2022
- With the Bank of England and ECB also having turned more hawkish, we foresee more rate-related volatility and carefully look at implications across asset classes. In fixed income, we keep duration short-to-medium, and in equities, we balance growth vs value exposure, while maintaining an overweight in financials and energy stocks. We have been reducing cyclicality but think it is premature to be outright defensive. Investors looking for geographical diversification will find resilient growth in ASEAN countries
- Geopolitical risk around Ukraine has risen further in recent days and although we do not speculate, military action would affect markets in a number of ways. Risk appetite would be hit and volatility would rise, again underscoring the need to build resilient portfolios. Energy prices would spike further, depending on the duration of the conflict. Some energy companies would benefit in the short term, but our Energy Transition would see a further boost from governments and companies trying to secure their energy supply in the future. The euro could weaken vs the US dollar, while US Treasuries, gold and commodity currencies could see support. We think our Total Security theme would benefit too