Stagflation less likely but not off the mark: Aviva
Market comparisons to the stagflationary environment of the 1970s are probably excessive, according to Aviva Investors, but there are still similarities.
Aviva expected global growth to slow in 2022 but remain robust with world gross domestic product (GDP) growth likely to be around 4% this year and just above 3% in 2023.
The asset management firm said high inflation was already eroding household real incomes and hurting sentiment, both of which would act as a brake on growth this year and next.
“Inflation is still expected to fall back later this year and during 2023, but the risk of a more damaging and lasting episode has risen,” it said.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said: “Recent events in Ukraine serve to highlight the fragility of the global geopolitical and economic order. These are likely to usher in a period of greater uncertainty, increased economic and market volatility and more challenging asset allocation decisions.
“With growth expected to remain above trend this year, and corporate pricing power seemingly robust, we prefer to be modestly overweight equities in developed markets, with a more neutral view in emerging markets. Recent spread widening in credit markets has provided an opportunity to move from a preferred underweight to neutral.
“With positive inflation surprises more likely and policy rates rising significantly to address overshoots, inflation risk premia need to be higher, while real rates need to adjust to slow growth. As such, we prefer to be underweight duration.”
Aviva Investors said slower growth and high inflation had put central banks in a difficult position, but most had clearly signalled a need for significantly tighter monetary policy, with the most forceful message coming from the US.
“Policy rates may need to move above neutral to slow growth and bring inflation back to target. This raises the risk of excessive policy-induced slowdown,” the asset manager firm said.
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