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A synchronized global economic downturn is underway

  • The global economy has been hit by several headwinds, almost all of them leading back to higher inflation. Europe is likely already in recession, the U.S. will enter recession in Q2 2023, while China struggles to make recovery headway. 

Global inflation will only decline at a painfully slow pace

  • Global inflation has peaked, but price pressures are proving very broad-based and sticky, particularly in the United States. Deliberate central bank action to create labor market slack and weaken demand is needed to lower inflation.

Global central bank tightening has further to go

  • Federal Reserve (Fed) policy rates are set to hit 4.75%–5% in 2023 and stay at that level for most of the year. Other central banks are also tightening but the Fed is relatively more hawkish, putting upward pressure on the U.S. dollar.

Equity markets have further to slide

  • Markets have faced up to the reality of central bank tightening, but now need to adjust to a slowing earnings profile. Investors should focus on segments of the market which benefit from low growth and the strong U.S. dollar.

Fixed income investors should seek safety and high quality

  • Rising recession risk will put downward pressure on U.S. Treasury yields and spur further spread widening, thereby taking the shine off short duration, low quality assets.

Challenged equity and fixed income markets create a positive backdrop for real assets

  • The diversification benefits of real assets in this macro environment are particularly valuable, as are their fundamental strengths and defensive characteristics.

Liquidity crisis:

  • As central bank rates rise and the U.S. dollar continues to strengthen, liquidity shortages may abound. A market dysfunction, if large enough, could drastically change the outlook with central banks needing to decide how much liquidity pain are they willing to tolerate in their bid to fight inflation? Financial stability or low inflation – one goal would have to be abandoned.

Stubborn inflation requiring 5% plus policy rates:

  • If higher wage growth becomes entrenched, the Fed may need to extend their hiking cycle and raise rates even beyond the 5% we anticipate. This attempt to deliberately shock the economy into an extended recession would raise unemployment several percentage points, risking a sustained and structural hit to the labor market, not to mention a very prolonged and difficult period of low market returns and high volatility. 

As of 30th September 2022. These are the current views and opinions of Principal Global Asset Allocation and is not intended to be, nor should it be relied upon in any way as a forecast or guarantee of future events regarding particular investments or the markets in general 

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This document has been prepared by Principal Global Investors for informational purposes only. The contents of the document should not be construed as an advice on legal, financial or regulatory issues. No person should rely on the contents of this document without first obtaining independent advice from qualified professionals. The National Bank of Ras Al Khaimah (P.S.C), its employees and consultants expressly disclaim all liability and responsibility to any person who reads this document in respect of anything done or omitted to be done by such person in reliance, whether wholly or partially, upon the contents of this document and shall not be responsible for the results of any actions taken on the basis of information provided in this document or for any error in or omission in this document.