Central banks, primarily the US Federal Reserve, have confirmed their determination to maintain a restrictive policy until inflation returns to target and will remain there for some time. A clear message that has clipped the wings of the attempted summer recovery of the stock and bond markets.
“As central banks’ determination to fight persistently high inflation and slowing growth lead to increased market volatility, we believe the absolute return outlook for equities has become decidedly unattractive,” reads Investment Monthly by Credit Suisse. The Swiss investment bank has led the equities to an underweight position in portfolios as it believes equities face a number of challenges in the future as rising central bank rates increase financing costs for businesses, while the slowdown in growth weighs on revenues. Credit Suisse, on the other hand, maintains its neutral allocation to total fixed income, but continues to see opportunities in hard currency bonds from emerging markets, both corporate and sovereign, as they offer an attractive yield spread.
“While the environment is undoubtedly difficult, we believe that investors should not throw in the towel and completely exit the markets. Rather, they should focus on diversifying their portfolios as broadly as possible, considering alternative investments, including private markets, as an attractive area to consider, ”assert Michael Strobaek, Global Chief Investment Officer of Credit Suisse and Burkhard Varnholt. Burkhard Varnholt, Chief Investment Officer at the Swiss Universal Bank and Deputy Global Chief Investment Officer at Credid Suisse.
In detail, Credit Suisse sees high inflation forcing central banks to raise interest rates until Q1 2023, believing the US Federal Reserve to cut rates unlikely in the second half of 2023. Global growth is expected to remain very weak. and Europe will enter a recession in the fourth quarter of this year. US growth according to Credit Suisse is likely to slow in 2023, to a rate of less than 1%, making it very vulnerable to unexpected shocks.
The global economy has entered a period that Credit Suisse calls «Great Transition», Which could lead to greater volatility and inflation in the future. “We believe that, in the future, we will see more erratic and volatile economic growth, col return of boom-bust cycles. To contextualize this phenomenon, we can examine data from the National Bureau of Economic Research (NBER) on the expansions and contractions of US business cycles. In the four decades following the Second World War, there were eight contractions. According to the NBER, however, since 1985 (the time of the Great Moderation) there have been only four contractions. We believe the current economic slowdown is part of this more volatile picture. The increase in volatility is also likely to contribute to changes on the inflation front. Investors should expect higher inflation than in the past 20 years, although hyperinflation is unlikely. We can consider the current high levels of inflation an anomaly, as they are linked to the pandemic and the war in Ukraine ”.
“The future is always uncertain. But we can manage the transitions through a systematic investment processwhich guarantees that the investment decisions are guided by logic and not by emotions“, asserisce Daniel Imhof, Head of Global Investment Management di Credit Suisse.