Keep your seatbelt fastened, we are approaching turbulence ahead

 

September 2022 | 3 min read   

Keep your seatbelt fastened, we are approaching turbulence ahead

"Ladies and gentlemen, this is your captain speaking, we would suggest you keep your seatbelt fastened as we are approaching an area of turbulence”. Every one of us has heard these words at least once; today however, this sentence does not only apply to air travel, but describes the current global markets situation.   

Markets have been on a bumpy ride over the last few months, and the end of the season further complicates the global macroeconomic scenario. After a summer characterised by a short-lived rebound of risky assets particularly in the US and Europe, divergences in economic growth prospects, inflation and policy responses are now becoming more prominent. As a result, stagflation scenario is coming back on the scene as one of the main risks for developed markets.

We believe the US may be heading towards a soft landing, even if the risks of a recession for mid-2023 have increased. The deterioration of economic activity is still not a product of the ongoing Fed monetary tightening, the labour market is still buoyant, but dark clouds are amassing over the horizon. The second quarter GDP reading marked the beginning of a technical recession, but the most recent estimate shows signs of an expanding economy.

The situation looks different in Europe as stagflationary shock seems to be a certainty now, especially due to the challenges on the gas front imply that it will be prolonged. The last quarter of this year and the first of 2023 will probably bring negative GDP growth.

In China, growth has been revised down further, as we believe the housing recovery may be lower than expected, but the picture is still one of recovery. Regarding the rest of the year, the continuation of the post-Covid reopening and the supportive policy mix could be the main drivers of the economic rebound, but the potential risk of recession should also be taken into account, as the short-term challenges persist. In our view, the downside risk probability remains significantly high, while the inflationary environment is confirmed.
In light of this complex scenario, we believe that investors should adjust their asset allocation stance.

We believe that it is time to look at reducing equity exposure and become more defensive, due to several factors (Central Banks communications, news regarding the energy crisis and global macroeconomic weakness) that may bring volatility over the short term. For this reason, we have started to move towards a more cautious stance on equity. Specifically on equities, we keep our preference for the US vs Europe, as well as for China, even if on a lower extent than previously due to volatility driven by Covid restrictions and a weak housing sector.

Bonds are back, but an active approach is paramount given the still high uncertainty. Following the “great repricing” of the first half of the year, yields are more appealing. In our opinion, a tactical approach to duration management should be preferred, considering that markets are driven by inflation and growth expectations.

In credit, we keep a cautious stance in particular regarding the high yield segment. We favour the investment grade space and the US over Europe, since US fundamentals are less at risk of deterioration due to a higher resilience of the economy. We believe an active management approach in bonds is crucial amid risks of further increases of inflation. In our view emerging markets may offer selective opportunities, as we do not see systemic risks while we see higher probabilities of idiosyncratic risks, encouraging a selective approach in this space.

As a result, we believe that it is important to keep a cautious view, be vigilant on the evolution of the economic backdrop: to sum up, keep your seatbelt fastened as we are not out of the storm yet.

Source: Amundi, 7 September 2022.

Important information
Unless otherwise stated, all information contained in this document is from Amundi Asset Management S.A.S. and is as of 14 September 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management S.A.S. and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. All investors should seek professional advice prior to any investment decision, in order to determine the risks associated with the investment and its suitability. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results.

Date of first use: 14 September 2022

Doc ID 2424141