In recent weeks, market dynamics have remained more or less stable, with only inflation surprises remaining the main source of concern. “Faced with greater inflation uncertainty and the inability to ignore the risk of market pullback in the short term, investors should keep liquidity to a minimum and prefer well-diversified multi-asset portfolios with equity exposure enough”. It can be read in the report Investment Weekly Expert International di Credit Suisse, according to which “after June we will enter a period of 12-18 months of uncertainty about inflation that is extraordinarily high compared to the last twenty-five years”.
However, the report reads, “from an investment perspective, before any longer-term normalization, there is the short-term first. And in the short term, the risks are on the upside. How financial markets might move in response to a specific inflation trend will depend on how this will shape monetary policy interventions ”.
The possible moves of the Fed and the ECB
Credit Suisse provides two Fed rate hikes in 2023, the announcement of reduced asset purchases by the end of this year and a decline in purchases by mid-2022. These expectations, the report read, “are based on our central forecast of core inflation between 2.0% and 2.5%. If inflation turns out to be significantly higher, then the Fed could start raising rates in early 2023 or late 2022 and reducing purchases early next year ”.
As for the Eurozone, according to Credit Suisse, the ECB could slow the pace of asset purchases under the Pandemic Emergency Purchase Program (PEPP) in June. But, the report reads, “we expect the PEPP to continue through the first half of next year and the traditional quantitative easing program to continue throughout the next year.”
Three stocks to defend against the surge in inflation
Equities are the best-positioned asset class to withstand periods of reflation, such as the one we are currently experiencing. Credit Suisse highlights three attractively valued stocks from sectors that should do well in an inflationary environment.
An important growth driver, the report reads, is the diversified mining portfolio of Anglo American. “The stock had a stormy 2020, however we expect an operational recovery in the coming years, followed by a recovery in the diamond market and the subsequent take-off of the Quellaveco copper project. Now that Anglo is gradually achieving operational stability along with a solid balance sheet, clear cost control and continuous innovation, important results are expected on the growth front ”.
The second stock reported by Credit Suisse is AXA. The report states that “the group has undergone a radical transformation of its business, which moves towards the P&C (non-life and accident), protection and life insurance sectors, while cutting exposure to investment earnings and life insurance traditional. The company has returned to paying its full dividend in 2021, and we expect a dividend CAGR of 5% ”.
Finally, Credit Suisse recommends Volkswagen, “An early-cycle value stock trading at a 12-month forward P / E of 7.6x, despite the decline in auto volumes since last summer, we expect the bullish cycle to continue well for most of 2022. While the shortage of chips and the rise in raw materials represent headwinds, Volkswagen has raised its guidance for the year 2021 on the occasion of the disclosure of the data for the first quarter. Volkswagen is also among the leaders in electric vehicles (EVs), with EV volumes already close to those of Tesla. In our opinion, this should lead to a re-rating of the stock, given that EVs’ pure plays deal with much higher ratings ”.