The Emerging Markets Hurdles

Tuesday 12 July 2022

Cross Asset

   

The Emerging Markets Hurdles

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.

The Emerging Markets Hurdles

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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.

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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.

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A Late Cycle With a Greater Focus on Inflation

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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