Recession: a question of when
Following a strong rebound in 2021, the global economy now looks to be heading towards a marked slowdown amid a confluence of threats.
The risk stems from the need for central banks to slow growth sharply to cool inflation. Inflation is still rampant across much of the developed world, driven by supply-side shocks, including supply-chain disruption and the war in Ukraine, and pent-up demand following Covid-19 lockdowns. Sharp increases in interest rates and balance sheet run-off are the banks’ principal tools.
Unemployment will need to increase in order to temper robust wage growth. Bankruptcies may also result from the drop in demand.
Once growth has slowed and inflation looks set to decline back to central bank targets, interest rates will revert towards pre-pandemic levels. Nonetheless, rates will likely settle at higher levels than in the period from the Great Financial Crisis to the end of the pandemic. Several of the factors that created the prior low inflation, low interest rate world have become less forceful, particularly globalisation.
HIGHER, THEN LOWER RATES
How to respond
Against this backdrop, investors may want to prepare portfolios for further pressure on risk assets and seek to diversify their holdings. Here are our suggestions.
Protection against inflation over time
Low volatility equities
Enhance diversification and lower portfolio sensitivity to interest rate movements
Sustainable euro bonds
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