Carmignac outlook: four unfavorable factors for the global economy in 2022

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Chief economist Raphaël Gallardo points to the 5e wave of COVID, the shock of food and energy prices, the slowdown in Chinese real estate and monetary tightening in emerging countries and the Anglosphere.

Macroeconomic outlook

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Raphael Gallardo
Chief Economist

  • Four unfavorable factors are likely to exacerbate the slowdown in the global economy next year: a 5th wave of COVID, a shock in food and energy prices, the slowdown in the Chinese real estate sector and the monetary tightening of emerging markets and the Anglosphere.
  • The US economy, which is less vulnerable to these shocks, is expected to intensify its inflationary decoupling from the rest of the world.
  • While it is true that the Federal Reserve (Fed) can no longer afford to be patient, the onset of monetary normalization should pose new risks for financial markets, given the high valuations of domestic assets.
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“The European economy is suffering from rising energy bills and its dependence on global manufacturing supply chains, still disrupted by the pandemic. However, unlike the United States, it should benefit from the positive budgetary impetus from the Next Generation EU plan. ”

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“Given the ongoing adjustment of its real estate sector, China still needs strong exports to maintain adequate GDP growth. Beijing should therefore continue to resist the appreciation of the CNY by accumulating foreign assets. Much of these foreign assets are expected to be recycled in the US Treasury bill market, potentially complicating the Fed’s monetary normalization job. The United States should maintain pressure on China to adopt a broader stimulus policy in 2022. “

Investment strategy and allocation

Kevin Thozet
Member of the Investment Committee

  • Regarding equities, we focus on sustainable growth companies with good visibility, that is to say, not too dependent on the economic cycle and able to pass on cost-induced inflation while preserving the ‘activity.
  • In the bond segment, we selectively target corporate bonds offering attractive yields and whose business models are not excessively disrupted; a necessary characteristic in a context where financial repression and abundant liquidity distorts the mechanisms of price discovery – which globally underestimate the risk of default.
  • Emerging markets offer pockets of value (in both bond and equity markets), having been penalized by orthodox policies in China, inflation and the prospect of a “normalization” of US monetary policy .

“We have gone from an environment of unlimited quantitative easing and low long-term rates a year ago to one of rapid and widespread interest rate hikes. Faced with an economic environment differentiated between economic blocks, the context justifies a differentiated approach. ”

“Investors potentially commit to a high level of credit risk for real returns close to 0%. This abundant liquidity associated with such an environment of financial repression means that the price discovery mechanism is not working as it was before. The resulting inefficiencies are positive for active managers. ”

In such a context, which could be characterized by persistent inflation as the economic cycle matures, our risk management tools focus on:

  • Active management of exposure to bonds issued by well-rated sovereign issuers, given the volatility of interest rates due to concerns about inflation and debt levels, low bond yields, which are evident insufficient to absorb this volatility and markets particularly prone to upward and downward adjustments.
  • Cash and short-term instruments seem best suited to weather episodes of volatility.
  • The US dollar, given its status as a safe haven and its dynamics.

Source From: Google News

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