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Global economic defenses are being tested

  • The U.S. economy will likely surrender to recessionary pressures in 2023, slightly later than Europe, which is more exposed to the energy price shock. By contrast, China could see stronger growth this year as policy stimulus rises.

Inflation will only decline at a painfully slow pace

  • Although U.S. inflation could peak soon, the broadening and stickiness of price pressures implies headline Consumer Price Inflation (CPI) will only fall to 6.5% this year, before recession accelerates the decline in 2023.

The Federal Reserve is focused on price stability

  • Policy rates are set to hit 3.5% by year-end, before peaking at 4.25% next year. Other developed market central banks will also hike in response tohigher inflation, but they’ll likely stop short of the Fed’s peak, keeping the U.S. dollar strong.

The equity market drawdown has been primarily rates led

  • A near-term bear market rally is possible as Fed rate expectations settle and inflation peaks. However, with margin pressures growing and demand weakening, earnings concerns are mounting, so a sustained rebound is unlikely.

A more defensive positioning is warranted in fixed income

  • Rising recession risk will put modest downward pressure on U.S. Treasury yields and spur further spread widening, thereby taking the shine off short duration, low quality assets. Investors may want to re-focus on core bonds.

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

  • The diversification offered by real assets is particularly valuable in this environment, as are their defensive characteristics. The stubbornly high inflation backdrop should likely extend the outperformance in commodities and infrastructure.

Sizeable energy disruption:

  • An escalation in the geopolitical conflict that results in a sustained cut-off in Russian energy supply would not only push global energy prices and inflation even higher, but it would also generate an acute stagflationary economic shock to the global economy, prolonging and deepening a recession.

Fed policy mistake:

  • Although the market may be concerned that the Fed will hike too far, there is a risk it instead capitulates to market fears and stops tightening too early. While markets may initially respond positively, inflation and inflation expectations would likely resume a sharp upward path, enhancing the Fed’s task. In that event, the Fed would need to hike even more
    Playing defense than in the current trajectory. 

As of 30th June 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.