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Friday 06 January 2023
January 2023 | In Europe, due to high inflation and a fall in household and business confidence, the outlook remains uncertain, with a risk of gas rationing during the winter, which would cause industrial production to fall further. In the short term, the drivers of domestic demand (consumption and investment) have been weakened. High energy prices are weighing on industry, construction, and investment. Meanwhile, inflation is reducing real incomes and real wages are falling despite increases in negotiated wages and a strong labor market.
01 | This Month’s Topic: In one month, China dropped most of its Covid-related restrictions, vowed to support the housing market more, and set pro-growth policies. We expect the Chinese economy to be separated from the global slowdown in 2023.
02 | Thematic: The energy crisis resulting from the war in Ukraine has profoundly altered Europe’s economic performance and prospects. Countries have been affected unevenly, based on how dependent they are on Russian gas and oil.
03 | Global Research: Recession risks remain prominent for mid-2023 in the United States, while for Europe we confirm our expectations of a cost-of-living- and inflation-driven recession during the upcoming winter season.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of January 06, 2023. 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 US 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. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.
The economic backdrop foreseen for the next 12 months suggests that the ongoing market correction will continue through the first half of 2023. In the second half of the year, we expect some of the headwinds to abate due to lower price pressures and a hold on interest rate rises. We believe this will support a gradual shift from a defensive stance, with its tilt towards gold, investment grade credit and government bonds, to increased risk exposure through developed market equity and high-quality credit.
As part of its fight against elevated inflation, the Fed has raised its key rates very rapidly in 2022 and in June began to shrink its balance sheet by non-reinvesting a portion of its maturing agency mortgage-backed securities and Treasury securities. Recently, the cost of the Fed’s liabilities has increased sharply and outpaced the earnings on its assets. These “losses” could grow if the Fed continues to raise its key rates and if it maintains them at a high level for some time to come.
Market volatility has remained above average as growth concerns seeped into valuations, particularly in Europe, the region more affected by recession fears and high inflation due largely to the energy crisis. However, current valuations only partially reflect the deteriorating global scenario, leading us to expect volatility to continue. In equities, our relative preference is for the US, though the outlook has weakened.
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Securities offered through Amundi Distributor US, Inc.
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Underwriter of Pioneer mutual funds, Member SIPC.