Global Strategy 2Q22
The uncertainty caused by the war in Ukraine, the sharp increase in commodity prices, and the deterioration of supply chain issues are dampening the economic outlook. At the same time, the inflation risks have increased drastically. The Fed has promised a faster monetary tightening, while the ECB will be normalising the monetary policy gradually. We continue to prefer equities and corporate bonds across all rating segments from defensive sectors, especially from issuers with strong clout when it comes to setting prices.
Economy: Economic growth in the Eurozone should have picked up speed again in 1Q due to the sustainable re-opening steps that we have seen. However, the war in Ukraine is now causing economic downside risks. Commodity prices have increased worldwide as Russia and Ukraine are globally important exporters of fossil energy carriers, metals, and food. The higher prices could dampen private consumption, and any new deterioration of supply chain problems affects the manufacturing sector. At the same time, the upside risks for this year’s inflation have increased. The development of the economy and inflation from here on out will depend on the course of the war and the tensions between Russia and the West. In the USA, the economic recovery has already made more progress, and the labour market has recorded strong employment growth. Here, too, we expect to see the economy affected by the high inflation and rising interest rates. The real estate market is likely to cool down as well.
Bonds: The commodity costs and the deterioration of supply chain problems have caused the upward revision of the inflation forecast for 2022. The ECB envisages inflation rates for 2023 and 2024 close to its target. If the medium-term inflation outlook does not deteriorate until the meeting in June, the ECB intends to end the bond purchase programme (APP) in 3Q. For the time afterwards, we expect the deposit rate to be raised in December. Given the strong inflation momentum, the yields of German government bonds have increased across all maturities. As soon as a gradual upward path emerges, the yield curve should flatten from the short end. The US Fed promised a faster monetary tightening with several rate hikes until the end of the year. However, it bases its model on the assumption of a continued strong economy and high inflation. The bond market, on the other hand, is already pricing in a weaker economy, the yield curve has flattened, and an inverted curve is only a matter of time.
Currencies: The war led to safe-haven flows and an appreciating US dollar and Swiss franc relative to the euro. Fundamentals suggest a weaker USD and CHF for the coming quarters. The gold price is up, benefiting from sustainably negative real yields.
Equities: Positive sales and earnings growth should support the global equity market. We expect a performance within a bandwidth of 0 to +5% amid heightened volatility. European companies are more badly affected by rising energy prices and deteriorating supply chain issues than their US peers. Therefore, European indices should suffer more from the uncertainty and the decrease in growth momentum.