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Tuesday 12 July 2022
July 2022 | 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.
01 | This Month's Topic: The macro financial outlook remains challenging amid growth concerns, still-high inflation and tighter global financial conditions. The current geopolitical environment, with its impact on macro and financial conditions, is making an idiosyncratic crisis more likely.
02 | Thematic: The European Central Bank is determined to tighten its monetary policy in the face of record high inflation levels. This action could cool inflation down, push the economy into recession or trigger a spike in peripheral debt borrowing costs.
03 | Global Research: A sharp economic slowdown seems to be looming in both Europe and theUS, which would make bond markets attractive again, especially in the US. Conversely, the Chinese economy is expected to reaccelerate. International monetary system set to become multipolar as geopolitical factors are likely to prevail.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of July 12, 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 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.
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.
We see sustainability of margins/earnings as the key driver of allocation across sectors. This leads us to an overall preference for defensives. In some cases, cyclical sectors can also offer resilient margins and profitability. Across non-defensive sectors, we believe Energy might have further upside, especially if the economic downturn proves mild. High-quality areas such as Luxury Goods are a key overweight in our view as a sector where profitability and margins are very resilient.
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