When is the recession? The question is not yet elucidated. She remains in the minds of all financial specialists, including Eliana de Abreu, director of management at Crédit Mutuel Asset Management. The manager does not hide her concerns as inflation seems inexorable and implies rapid monetary tightening. In this context, she made a point of presenting her perception of the market and the consequences of the current instability on her asset allocation strategy.
Towards a stagflation scenario
The subject that has been in the headlines for several months is that of inflation, reaching levels not recorded since 1981, in the euro zone and the United States at 8.6% and 9.1% respectively, in June. On the other side of the Atlantic, the surge in prices should remain on a high plateau for several months. even if it is very difficult to make predictions “. Eliana De Abreu adds that food prices could still accelerate their progression and boost the soaring prices. At the same time, the so-called “second round” effects should manifest themselves in an upward price-wage spiral, particularly in the United States where ” the job market is very dynamic “.
The response of central banks is proving difficult to adapt because this inflation reflects more ” a lack of supply rather than an excess of demand “. The only way to slow the surge in prices is therefore to slow down demand by raising rates. A solution thatultimately, will lead to a downturn in economic activity and, for the most pessimistic, a recession. In the event that the prices do not come down, the penalty will be doubled. Global economies will be heading for stagflation, which is high inflation combined with depressed economic activity.
The consequences on the stock market
This shift in monetary policy leads to adjustments in equity valuations and earnings forecasts. On the first point, corrections have been made, for example with the integration of rate hikes in valuation models (notably with the Discounted Cash Flow method). On the second point, the manager is more reserved, believing that market forecasts remain too high compared to the levels that should be observed. Unpleasant surprises could appear in the third quarter. Thus, by virtue of these considerations, the market specialist recommends an allocation to defensive sectors (telecommunications, health, consumer staples). Priority should also be given to companies with a pricing poweri.e. able to pass on cost increases to their selling prices (big brands for example), because they thus preserve their margins “.
In terms of geographical areas, European companies remain very vulnerable to the Russian-Ukrainian conflict which could be the source of serious difficulties in the supply of raw materials, particularly gas. The situation is less problematic in the United States, which is more energy independent from Russia. On the other hand, the rate hikes decided by the American Federal Reserve strongly penalize the companies of the Federated State. In China, the hope of a rebound in the third quarter is bolstered by fiscal and monetary stimulus, which should support investment. The very strict confinements and the fragility of the real estate market remain points of vigilance.
Ambivalent impacts on fixed income
In addition to equities, rate hikes affect government bonds. For example, across the Atlantic, the US 10-year rate has climbed 2.5 times in the space of a year and is now around 3%. The consequences in the monetary union are more delicate, because they favor the fragmentation of the financing costs of government debts, those of the countries of the South (Italy, Greece) increasing more rapidly than those of the North (France, the Netherlands). The anti-fragmentation tool, announced by the European Central Bank, will play a central role in the fight against this phenomenon, even if its operation remains to be clarified. In this inflationary context, bonds indexed to inflation thus remain favored by Crédit Mutuel AM.
The balance of power between currencies is turned upside down on this fragile economic terrain, while ” the dollar still plays its role as a safe haven commented Eliana de Abreu. The resulting quasi-parity with the euro could have benefited European exports but does not come at the right time. Indeed, the production capacities of European companies are limited by shortages (components, raw materials), particularly in Germany. In addition, the weakness of the euro presents a negative point since it feeds the inflation figures by inflating the prices of imports, particularly on energy materials. The manager also explains that the price of a barrel of oil, whatever the evolution of the conflict, should remain at high levels in the short term (more than 90 dollars a barrel).
RG