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Thursday 03 March 2022
March 2022 | The recent rise in market uncertainty has been driven by escalating geopolitical tensions, the hawkish pivot from central banks, and stubborn inflation. Collectively, these indications, as well as the effects of inflation on consumers’ disposable incomes, represent a major risk. However, financial conditions remain easy and economic growth is robust. Thus, we don’t think it is time to structurally move to a risk-off allocation. We do think investors should tactically readjust risk exposure while maintaining a well-diversified and active stance.
01 | Thematic: The invasion of Ukraine by Russian troops has caught Europe off guard, leading Western democracies and Russia to engage in unprecedented confrontation. Resulting sanctions will likely result in a deep recession in Russia, which should prevent Putin from financing a long war.
02 | Amundi Institute: Through our new Amundi Institute, investors can expect a deeper dialogue and sophisticated advice to build more robust portfolios owing to the many structural regime changes under way in areas such as inflation, the environment and geopolitics.
03 | Global Research: We are in the middle of a regime shift characterized by unprecedented inflationary forces not seen in the past five decades. The future will likely bring a harsh readjustment of the geopolitical order and higher fragmentation, the final death of globalization and the emergence of regionalization centred on new global powers.
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The greater the gap between what central bankers say and what people believe, the higher may be the cost of bringing inflation under control since significant monetary policy tightening will be needed to rein in expectations about how fast prices will rise. The current collective memory has instead been shaped by an environment where central banks were more concerned about undershooting their inflation targets and were free to act to support growth.
The age of the 'Great Coincidence' in the policy mix is over. Budget deficit reductions are near, and will be accompanied by diminished household savings and greater pressure on corporate profits in light of wage negotiations. The widespread belief that fiscal spending is effectively unlimited is going to be severely tested. On the monetary side, we're witnessing the end of ultra-cheap money. Central banks have had to hike rates and drain liquidity in this time of looming stagflation, but will maintain a benign-neglect tilt and allow inflation to run to preserve growth.
We are witnessing significant divergences in the economic outlook (we have revised down the EU and Chinese economic outlooks vs. that for the more resilient US economy) and in market performances. From an investment standpoint, while investors should maintain a neutral risk stance, there is room to play these divergences across the different asset classes. As the great asset repricing unfolds, investors should be ready to adjust their allocations to deal with inflation.
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