Summary
ABSTRACT
As we enter the tail end of the Covid-19 recovery boost, authorities in developed markets are seeking to implement fiscal packages of varying degrees to control the eventual economic cool down. Much of the narrative has now shifted to the surging inflation worldwide, where over the past months the theme has evolved from “transitory” to “persistent” indicating possible signs of the global economy overheating. The drivers behind the surge are locked in a vicious self-feeding cycle: supply disruptions, release of pent-up global demand, all the more amplified by a significant rise in energy and food price with the impending cold weather season. As the phenomenon is of a global nature, the ball now lays in the court of the various monetary authorities, as they juggle the interplay between waning economic growth and possible run-away inflation.
The question of when to initiate rate hikes is undoubtedly on the minds of the CBs, as we see each taking different approaches to such conundrum. The most hawkish tone continues to be that of BoE despite its most recent communications, indicating a possible initial rate hike in the short term followed by further raises up to 2023 in an attempt to spread the pain proactively staving off any possibility of inflation running amok. All eyes are next set on possible actions to be undertaken by Fed having just announced the gradual scaling back of its asset purchase program, with latest indications pointing to patience while maintaining a watchful eye on inflation and labor market. On the opposite spectrum, lies ECB and BoJ, with rate hikes pushed off to the medium term given the historically subdued inflation dynamics and lingering uncertainties regarding the respective economies. The yield curve is expected to follow suit, resulting in a steeper normalization path for US and UK in contrast to steadier rates for the Japan and EU. For the time being, we continue to expect steady credit spreads in the short to medium term, as the phasing out of the various asset purchase programs is to be countered by the fiscal packages to come online and some normalization afterwards. Equity expected returns are confirmed almost stable in the medium to long term horizon. Even if equity price implies high valuation in absolute term, they have been mitigated by the recent sell-off. Equity valuations continue to be less stretched if compared with the fixed income assets.
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