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LGT Beacon: Past monetary largesse and current geopolitics point toward stagflation

June 22, 2022

We concluded our quarterly strategy review last week, just as market volatility had spiked ahead of a number of major central bank policy meetings. Within days, these meetings confirmed that global monetary tightening is set to continue at more rigorous pace. Economic growth is likely to slow further in the coming months. Against this background, we decided to remain positioned on the defensive side.

The US Federal Reserve, the Bank of England, the Swiss National Bank and the Bank of Japan have announced their latest policy decisions on June 16 and 17, which largely confirmed that monetary tightening is here to stay as a major headwind for the economy and financial markets. In this report, we provide a summary of our current views and investment decisions.  For the months ahead, we recognize serious challenges for the economy, as well as some potential opportunities in markets.

First, the macro challenges:

  • Fears of stagflation remain elevated as high and sticky inflation pressures central banks to tighten more swiftly and rigorously
  • This policy stance points to continued economic slowdown and potentially a recession with stagflationary features 
  • Waning post-pandemic dynamics and deteriorating business and consumer sentiment also contribute to the recession/stagflation angst 
  • The war in Ukraine and China’s lockdowns add to the uncertainty, and solutions to these issues aren't visible yet

On the other hand, there are some factors that mitigate the situation somewhat:

  • News flow, market pricing, and investor positioning suggest that we may be near a peak in the general unease
  • Many of the supply-side forces that are driving inflation don't have endless staying power, while others will fade due to monetary tightening  
  • Evidence of a lasting wage-price spiral is still rather scant, and the negotiating position of workers may weaken as the economy slows
  • The central banks' need to catch up with inflation is now broadly anticipated while China's problems are also well-documented, leaving room for positive surprises going forward
  • Fiscal policy remains supportive in most developed markets, in part buoyed by defense spending, while China is relaxing fiscal policy to support growth (its economy is also not facing the same inflationary pressures as the US and Europe)

To read the full report, click on the link: LGT Beacon

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Note: The next edition of the LGT Beacon is scheduled for July 2022.