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Global economic growth has surprised to the upside, but U.S. recession risk is rising.

  • Although U.S. growth has remained strong, even accelerating in early 1Q, leading indicators continue to signal recession. Tighter lending standards, as a result of the recent banking crisis, only increase the risk of a hard landing.

Price pressures remain too elevated; in most economies, inflation will end the year above target.

  • Part of the inflation basket will soften rapidly in response to normalizing supply chains and energy prices, but other key segments still require considerable weakening in labor markets if there is any hope of approaching target.

Central banks are nearing the end of their tightening cycles as financial stability risks increase.

  • Each additional interest rate hike increases the risk of further market turmoil. Central bank policy rates will likely peak soon, but rate cuts are unlikely unless there is a severe and dangerous spike in financial system stress.

Although equities have been resilient, earnings weakness will threaten further drawdown.

  • While 2022 dynamics were driven by inflation and rates scares, 2023 is likely to be dominated by earnings and economic growth scares. Margin pressures will weigh on company profitability, leading equities lower.

High-quality fixed income offers stability and income in this challenging economic backdrop.

  • Central banks are likely nearing the completion of their tightening cycle, implying that bonds will be able to support portfolios both as recession approaches and during forthcoming periods of volatility and risk.

Alternatives provide important diversification against traditional equities and fixed income.

  • While inflation is decelerating, it remains uncomfortably high, so portfolios still require allocation to real assets to mitigate inflation risks. Assets that perform well in elevated volatility environments should also be prized.

Entrenched inflation:

  • The drastic rise in rates risks severe liquidity disruption. Violent, sudden price moves in one market can provoke a vicious loop of margin calls and forced sales of other assets, with unpredictable results. Markets have so far navigated the rate increases and banking crisis without too much disruption, but there is no guarantee that the remainder of 2023 will be as straightforward

Price instability:

  • While the market appears to agree that inflation will fade this year, history suggests that there is a risk the meaningful inflation decline may not materialize. In such an event, after a short pause, the Federal Reserve (Fed) and other central banks may need to resume policy hikes. Not only would that deliver additional headwinds to growth, but also add to financial instability risk.

As of March 2023. 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.