Recession: a question of when
Following a strong rebound in 2021, the global economy now looks to be heading towards a marked slowdown amid a confluence of threats.
The risk stems from the need for central banks to slow growth sharply to cool inflation. Inflation is still rampant across much of the developed world, driven by supply-side shocks, including supply-chain disruption and the war in Ukraine, and pent-up demand following Covid-19 lockdowns. Sharp increases in interest rates and balance sheet run-off are the banks’ principal tools.
Unemployment will need to increase in order to temper robust wage growth. Bankruptcies may also result from the drop in demand.
Once growth has slowed and inflation looks set to decline back to central bank targets, interest rates will revert towards pre-pandemic levels. Nonetheless, rates will likely settle at higher levels than in the period from the Great Financial Crisis to the end of the pandemic. Several of the factors that created the prior low inflation, low interest rate world have become less forceful, particularly globalisation.
HIGHER, THEN LOWER RATES
Against this backdrop, investors may want to prepare portfolios for further pressure on risk assets and seek to diversify their holdings. Here are our suggestions.
Protection against inflation over time
Low volatility equities
Enhance diversification and lower portfolio sensitivity to interest rate moves
A flexible approach to navigate a range of scenarios
Sustainable euro bonds
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Investing in emerging markets, or specialised or restricted sectors is likely to be subject to a higher-than-average volatility due to a high degree of concentration, greater uncertainty because less information is available, there is less liquidity or due to greater sensitivity to changes in market conditions (social, political and economic conditions).
BNP Paribas Asset Management seeks to integrate environmental, social and governance (“ESG”) factors into all of our portfolios as a means to mitigate certain short, medium and long-term financial risks, identify better long-term investments, and encourage more responsible corporate behaviour. We will never subordinate our client’s interests to unrelated objectives. Certain issuers and industries are excluded from our actively managed portfolios based upon our view of their ESG performance and risk profile. As a result, we may pass up certain opportunities when these excluded issuers or industries are in favour. Due to significant gaps in disclosure regimes around the world, we may need to rely upon voluntary disclosures by issuers, which are often not audited. We therefore may not have consistent access to complete, accurate or comparable information about the ESG performance of our holdings. Please consult the applicable offering document for more information about the specific ESG strategy employed by each investment strategy since a given strategy may not have specific ESG guidelines, and investments are not limited to securities that are ESG compatible.