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Friday 04 November 2022
November 2022 | 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.
01 | The US Federal Reserve is shrinking its balance sheet as part of its fight against elevated inflation, but the process is being challenged by the Fed’s new role as a counterparty of money-market funds.
02 | Natural gas prices have plunged since their summer peak, but longer-term supply/demand tightness remains, calling for higher risk premiums.
03 | For equities, we believe earnings expectations are still too high, leading us to focus on bottom-up selection and to prefer idiosyncratic risks.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of November 04, 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.
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.
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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Securities offered through Amundi Distributor US, Inc.
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