Mosaique Views - Asset allocation

Dr. Carlos Mejia, CIO, Rothschild & Co Bank AG and Kevin Gardiner, Global Investment Strategist

 December 2021 - January 2022

The latest mutation of COVID-19 is unsettling. However, vaccines seem to offer some protection; it may not be as dangerous as earlier variants; and such risk is now almost familiar. Meanwhile, the global economy is finishing 2021 on a solid note, led – as so often – by the US. With the major re-openings behind us, growth may have peaked, but it can nonetheless remain above trend for a while.  

As a result, despite that new virus variant, we think the economic risks remain tilted towards inflation, not deflation. Headline monthly inflation rates may peak in early 2022 – the Fed was right to suggest that some of the surge is “transitory”, even though it has more recently tried to “retire” that word – but the underlying trends are likely to remain above target, on both sides of the Atlantic, for some time.

With the Federal Reserve in particular very visibly over-achieving on its inflation mandate, and increasingly close to delivering on its employment mandate too, the question increasingly is not “why would they raise interest rates?” but rather “why wouldn’t they?”. 

The stage thus seems set for the big central banks to start raising interest rates – led by the Fed and Bank of England (in the first half of 2022, perhaps), with the ECB and SNB some way behind (possibly in 2023). A dozen or so central banks elsewhere – in some smaller developed economies, but mostly in the developing world – have not waited for their bigger peers, but have been raising rates already in 2021.

Money markets may not fully reflect the higher  rates in prospect. Bonds are most directly affected, but stocks – the most volatile mainstream asset at the best of times – could also be vulnerable for a while.

However, expectations for corporate profits may still have not caught up with economic growth, and while stock valuations are on the high side, they are not prohibitively so. They remain our favoured asset tactically as well as strategically, and are the only one that we think can clear the higher inflation hurdle and help preserve the real value of our clients’ wealth.      

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