investment insights

    Global economy under rising pressure – a prudent investment outlook

    Global economy under rising pressure – a prudent investment outlook

    Investors are facing a challenging environment.

    Despite the political continuity in Europe following reelection of French president Emmanuel Macron, the outlook for the global economy continues to look poor, as the war in Ukraine enters a new phase. Slowing growth is meeting high inflation and the steepest tightening of monetary policy in decades.

    A lengthy conflict will shave between 0.5 and 1.0% off global growth this year and sanctions against Russia may widen to include oil. The shock from the war is being felt worldwide, especially through a sharp rise in commodity prices, which has created multi-decade-high levels of inflation in the US and Europe.

    Covid lockdowns in China are certainly not helping, by damaging global supply chains again, adding to existing pressures. If the lockdowns continue into May growth in China could slow from our 4.7% growth estimate.

    Can the Fed engineer a soft landing? It is possible – but tremendously challenging

    Can the Fed engineer a soft landing? It is possible – but tremendously challenging. Its efforts to cool the US economy leave little room for error. However, we do not see a recession as soon as this year, because growth is slowing from very strong levels.

    For investors, there are three main risks: rapid monetary policy tightening in response to record inflation, the impact of the Ukraine war, and the resurgence of Covid in China.

    Our portfolios remain prudently invested, with a neutral stance on equities. We have further reduced positions in small cap stocks, and added to US large capitalisations. US equities are more defensive in a late economic cycle, and offer more insulation from the war. We continue to prefer quality companies.

    Meanwhile, US real yields are nearing positive territory. We still underweight fixed income, with positions in Chinese and Brazilian sovereign debt offering some portfolio diversification.

    With both bonds and stocks under pressure, where else can investors find returns? Commodities offer one avenue. We hold a diversified basket that includes energy, gold and industrial metals. Another alternative is European real estate, where much of the market is indexed to inflation, and valuations may still catch up.

    In the meantime, the US dollar will continue to appreciate on rising US rates and lingering geopolitical uncertainties.

    The road to a more stable outlook will be long, as changing geopolitics, persistent inflation and rising rates add to market pressures. To meet the challenge of weaker growth prospects, we continue to focus on quality assets to build portfolio resilience.

    Important information

    This is a marketing communication issued by Bank Lombard Odier & Co Ltd (hereinafter “Lombard Odier”).
    It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a marketing communication.
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