Mosaique Views -Staying constructive

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

Growth has peaked, but may remain above trend for a while

Western governments have not reacted to the latest mutation of COVID-19 by locking down economies: 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 has started 2022 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 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 – the Bank of England has already acted, and the Fed may follow suite soon, with the ECB and SNB some way behind (possibly not until 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 were raising rates already in 2021.

Money markets – and investor expectations generally – may still 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. We are trimming our equity positions.

That said, we stay overweight. Stock valuations are on the high side, but not prohibitively so, and expectations for corporate profits may still be too low. 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.      

Contact us

Contact your client adviser or send us an email to receive the full publication. 

More Information

View more Wealth Insights

 

Read more articles

  • Perspectives podcast: Dispelling misconceptions

    Market Perspective

    Worries about growth, geopolitics, and an authoritarian government have dramatically dented sentiment in China.

  • The AI-driven surge

    Strategy Blog

    Chipmaker Nvidia has announced strong financial results. Alongside the rest of the ‘Magnificent Seven’ tech and AI stocks, it has been a key driver of the US market in recent times. But should investors now be worried about market concentration around these big names?

  • Japan: partying like it's 1989

    Strategy Blog

    Japan’s stock market is performing strongly, but we are unconvinced about the country’s long-term attractiveness. We believe the recent bounce in the Nikkei index is a sentiment or momentum driven story, and not one that yet reflects better fundamentals.

  • Disinflation, China and stock valuations

    Market Perspective

    Politics may well affect portfolios in 2024, but we know that the business cycle certainly will. In this Market Perspective, we examine the outlook for inflation, the case for and against investing in China, and whether stocks are currently being overvalued.

  • Rothschild & Co expands Middle East reach with new Riyadh office

    Press releases

    Leveraging the region's rich talent pool and Rothschild & Co's accomplished leadership, its new Riyadh office will enhance the Group’s business by offering their growing client base greater local proximity for strategic advice.

  • Perspectives podcast: A conversation with a senior adviser

    Market Perspective

    Simon Brewer, host of one of the most acclaimed finance podcasts, "The MoneyMaze Podcast, holds the position of senior adviser to Rothschild & Co in London. In this special edition of our Perspectives podcast, Laura Künlen and Simon Brewer delve into Simon's career journey, the insights gained from his experience as a senior manager, the responsibilities of a senior adviser, and how his podcast contributes to his effectiveness in this role

Back to top