Global activity is already slowing, as central banks continue to indicate that a further deceleration is needed to lower inflation. A growth scare is the most likely economic regime to be priced by market participants during the second half of 2022, according to recently published UBS Asset Management’s Panorama Mid-year outlook, titled “Inflation: Rising to the Challenge.”
Barry Gill, Head of Investments at UBS Asset Management, adds: “Markets and investors have scrambled to reprice risk, particularly in the growthier areas of technology disruption. The S&P 500 formally entered a bear market, and bonds and stocks started to positively correlate for the first time in over 20 years. The primary questions investors are trying to answer now concern the durability of the inflationary pressures and whether central bankers in their zeal accidentally tip the global economy into recession.”
The report’s outlook for the year includes:
Patient investors may be able to enjoy an even more attractive entry point for global equities, which may come if cyclical moderation in inflation allows central banks to shift in a more dovish direction allowing global economic activity to inflect higher.
Rising inflation has driven a sharp shift in investor preferences - traditional value appears to be back in fashion. Sustainable investors looking beyond the ‘already green’ may gain exposure to hidden climate solution assets at discount. These are typically emission-intense legacy sectors that must decarbonize. These businesses will likely be recategorized as green and earn higher valuations as they evolve.
Much of the first half of 2022 has been characterized by events that have shaken global risk markets. During these turbulent months, hedge funds generally weathered this period better than equity or bond beta, a pertinent reminder that adding a diversified hedge fund allocation to traditional portfolios may serve as a good diversifier, particularly in difficult market environments.
Our model showed that real estate offered a 78% inflation protection and up to 80% when further conditions such as real interest rates and variable property risk premium were applied. However, we are now seeing rising risk of stagflation, due to rising interest rates from central banks as they attempt to curb inflation.