“Investors face a fragmented environment”

Amundi analysts are in no doubt: the risks of stagflation are increasing as real growth is below potential and inflation is above central banks’ targets.

“While a soft landing for the US economy seems possible, the eurozone looks far more fragile, particularly hard hit by rising energy prices and China’s overall GDP growth should be less than 4% due to Covid restrictions. On the emerging markets side, countries with significant fiscal space as well as commodity exporters such as Brazil, South Africa and Indonesia are challenged to outperform the rest,” explains Vincent Mortier, Amundi’s Chief Investment Officer. Who expects lower growth prospects than we have been used to in recent years.

Benevolent neglect of inflation

As for inflation, he expects that it will not be a temporary phenomenon and will remain at high levels for a few more months. “Inflation has likely peaked, but price pressures are expected to persist due to supply chain bottlenecks, high energy and food prices, and rising wages.”

While Vincent Mortier believes that inflation will end the period of extremely low or even negative interest rates observed over the past decade, he believes that a full normalization of monetary policy is not on the agenda. “Central banks are trying to balance the need to contain inflation with the need to sustain growth, and should probably ‘sympathetically neglect’ inflation as part of that.

Adding to this new macroeconomic paradigm is the return of geopolitical risks. “Geographical risks are back amid mounting pressures for deglobalization, exacerbated by the Ukraine crisis.” Risks that increase market volatility.

A fragmented environment

“Investors face a fragmented environment characterized by slower growth, accelerating inflation and growing divergence between regions and sectors where the mix of monetary and fiscal policies will be crucial,” Amundi’s investment outlook for the second semester. In this increasingly complex context, where international trade is no longer the main driver of global growth, investors will benefit by seeking resilience and attempting to capture the opportunities presented by desynchronization of economic cycles and differing support policy paths could.”

For Vincent Mortier, investors should remain cautious in their risk management and benefit from seeking resilient assets and sources of positive real returns while seeking to take advantage of regional and sectoral differences caused by the desynchronization of economic cycles.

With the correction in assets in the first quarter – with the notable exception of commodities and the dollar – the relative attractiveness of equities versus bonds has faded and a more balanced allocation is now appropriate, the Economist believes.

A necessary diversification

As for equity markets, he prefers undervalued, high-quality stocks with high dividends – “Dividends are a stable component of performance when inflation is high.” “US stocks appear more resilient than European stocks despite elevated valuations, while Chinese stocks, already pricing in an economic slowdown and earnings downgrade, may surprise on the upside.”

In fixed income markets, Vincent Mortier recommends “taking a more neutral tactical approach to duration, relying on monetary policy divergences and inflation-linked and floating-rate securities to hedge against inflation. Amundi prefers developed market investment grade and emerging market high yield bonds.

Finally, given greater instability in correlations between asset classes in an inflationary environment, Amundi recommends additional diversification into commodities, currency strategies, particularly those that favor the currencies of commodity exporters, and alternative strategies that are weakly correlated with equities and bonds, such as real assets and especially real estate and variable-rate private debt.


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