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Economic growth risks are materialising in Europe and the US in light of rising costs of living (putting pressure on consumers), high energy costs and continued geopolitical tensions. The stagflation scenario - of low growth and high inflaton - is now the most likely for Europe. Meanwhile for the US, we see a deceleration of its economy, without a recession - a so-called "soft landing". This environment means investors should be more cautious on risk assets overall.
Central banks , such as the Fed, have further reasserted their intention to raise rates to fight inflation, leading yields on Treasuries to increase over the past month. Investors should be positive but stay active, given that yield movements are still volatile .
While corporate fundamentals remain strong for now, we think investors should favour high quality segments, avoid assets with excessive debt and be aware of liquidity risks, given risks on the corporate earnings front. This calls for a selective, agile stance, favouring US over Europe.
Equity values are not completely pricing-in a recession and market earnings expectations look too optimistic. As a result, investors should be selective and focus on businesses that can sustain earnings growth and reward shareholders. At a regional level, we favour US and to a lesser extent China but see some concerns over the country's Covid policies and the housing sector. Europe is the area most at risk and here we have become more cautious.
We see limited systemic risks in emerging markets but the diverging economic and inflationary backdrops in different regions warrants a robust bottom-up approach. In equities, some countries in Latin America present opportunies, given their commodity exports but we are cautious on certain Eastern European nations more exposed to economic damage from the war. In Emerging bonds we also see income opportunities, provided investors remain selective.
Although we think investors should stay slightly defensive, we do not think it is a time to structurally de-risk portfolios. There are opportunities in government bonds and, selectively, in quality credit and in Emerging Market bond space as countries are showing signs of increasing divergences. Equities are an area of caution, particularly when it comes to Europe. In general, a further deterioration of the economic backdrop could trigger another correction, underscoring the need to be vigilant and selective.
GLOSSARY
Autumn's puzzle: hard vs. soft landing
Bonds back in favour with yield repricing
Agile and neutral in credit
More defensive on European equities
Divergences abound in Emerging Markets
Fasten your seatbelts and stay vigilant on the outlook evolution
1. Inflation: Increase of the general level of prices for goods and services, decreasing purchasing power as a result.
2. Bonds: Debt instruments issued by governments, corporations and other institutions in order to finance their projects or businesses.
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. US Treasuries: Refers to govenment bonds issued by the United States.
5. Volatility: Measures used to assess the risk of a portfolio, as it helps to describe the likely range of returns that may be achieved by a fund. In statistical terms it is the annual standard deviation of the return distribution. Greater volatility of monthly fund returns means that there is a wider range of likely returns in the future, or greater uncertainty regarding the fund return, which most investors would equate with greater risk.
6. Liquidity: Capacity to buy or sell assets quickly enough to prevent or minimise a loss.
7. Systemic risk: Can be defined as a sudden deterioration in financial stability, caused by a clash in the functioning of financial services, which is then transmitted to the real economy through a series of chain reactions.
8. Bottom-up (stock picking): A stock selection approach that focuses on the analysis of a specific stock and its characteristics rather than of the related industry or the country in which the company operates.
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 September 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 September 2022.
Date of First Use: 12 September 2022.
Major themes to watch
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This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
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