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.      

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