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Dramatic price variations have occured over the past month in equity and bond markets , following inflation data , rising concerns over economic growth and central bank policy actions . Looking ahead, these factors should result in more desynchronisation of economic cycles. Investors should remain well-diversified, with an overall cautious stance on risk assets .
After the move in government bond yields experienced in this year's first semester, both in the US and Europe, we have moved to a less cautious stance than before on this asset class. However, central banks' focus on inflation, at a time of slowing economic growth could add uncertainty on the directions of bond yields. Hence, we suggest staying neutral and active.
In corporate bonds, investors should favour companies with strong fundamentals and low debt that can withstand the pressures from inflation, such as those in higher credit quality segments. At a regional level, our preference is for US over Europe, given the relatively strong consumption environment there.
We keep an overall defensive stance with a focus on less-cyclical areas given the potential pressures on earnings, owing to high inflation and slowing economic growth, particularly in Europe. Companies with strong pricing power, product differentiation and ability to maintain cash flows should do well.
Emerging Markets divergences are increasing as they are exposed to differing inflation and growth dynamics. Investors should explore these divergences, with a selective lens. Chinese equites, for example, could benefit from the country's move to become a more domestic-consumption oriented market, the economy reopening after the Covid lockdowns and a supportive policy.
The recent repricing is a reminder of a regime shift, in which concerns on still high inflation and decelerating growth are becoming prominent. Investors should move towards quality segments in credit and equity, and aim to benefit from the regional divergences that lead us to prefer US (over Europe) and now also Chinese equities. However, strong selection is important. In bonds, we suggest moving towards a neutral stance on government bonds, but keeping an agile view. On credit, we favour high quality debt, as earnings could come under pressure. Overall, a well-diversified stance, with a focus on liquidity and an unconstrained approach are favoured.
GLOSSARY
Play the desynchronisation of the cycle
Central banks tighten policy
Opportune time for quality
Earnings in spotlight for equities
Be selective in Emerging Markets and China
Watchful for some clouds - don't increase risks
1. Bonds: Debt instruments issued by governments, corporations and other institutions in order to finance their projects or business.
2. Inflation: Increase of the general level of prices for goods and services, decreasing purchasing power as a result.
3. Central banks: Financial institution given privileged control over the production and distribution of money and credit for a nation or a group of nations.
4. Risk: The concept of risk in finance is very close to that of uncertainty. The risk on a financial security may thus have several origins. In particular a distinction is made between economic risks (political, natural, inflation...) that threaten flows related to the securities and concern the business world, and financial risks (liquidity, currency, interest rate...) that are not directly related to these flows and are specific to the financial sphere. Whatever the risk type, the result is a fluctuation in the value of the financial security.
5. Corporate fundamentals: Refers to quantitative and qualitative information about a company such as profitability, revenue, assets, liabilities and growth potential.
6. Cyclical stocks: Refers to stocks whose performance follows the overall economy, rising when it grows and dropping during declines (e.g. luxury items, airlines, hospitality, etc.).
7. Liquidity: Capacity to buy or sell assets quickly enough to prevent or minimise a loss.
IMPORTANT INFORMATION
Diversification does not guarantee a profit or protect against a loss. Unless otherwise stated, all information contained in this document is from Amundi Asset Management and is as of 12 July 2022. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi Asset Management, and are subject to change at any time based on market and other conditions and there can be no assurances that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, as securities recommendations, or as an indication of trading on behalf of any Amundi Asset Management product. There is no guarantee that market forecasts discussed will be realised or that these trends will continue. Investments involve certain risks, including political and currency risks. Investment return and principal value may go down as well as up and could result in the loss of all capital invested. This material does not constitute an offer to buy or a solicitation to sell any units of any investment fund or any services.
Amundi Asset Management - Amundi AM, French joint stock company (Société par actions simplifée) with a capital stock of 1 143 615 555. Portfolio management company approved by the French Financial Markets Authority (Autorité des marchés Financiers - AMF) under no.GP 04000036 Head office: 91-93, boulevard Pasteur, 75015 Paris - France.
This document is issued by Amundi Singapore Limited (Company Registration No 198900774 E) and is for information only. The information contained in this document neither constitutes an offer to buy nor a solicitation to sell a product and shall not be considered as an investment advice. While reasonable care has been taken to ensure that the information contained herein is not untrue or misleading at the time of publication, Amundi Singapore Limited makes no representation as to its accuracy or completeness. Opinions expressed in this report are subject to change without notice. We do not accept liability whatsoever whether direct or indirect that may arise from the use of information contained in this document. Amundi Singapore Limited, its associates, directors, connected parties and/or employees may from time to time have interests and or underwriting commitments in the securities mentioned in this document. Past performance and any forecasts made are not necessarily indicative of the future results. All investments carry certain elements of risk and accordingly the amount received from such investments may be less than the original invested amount. This document is not intended for citizens or residents of the United States of America or to any «U S Person» as this term is defined in SEC Regulation S under the U S Securities Act of 1933. The information contained in this document is deemed accurate as at 12 July 2022.
Date of First Use: 12 July 2022.
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This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.