Volatile financial market conditions continue to drive inflation up in the UK and Guernsey, but the picture is brighter in the US and Europe, a local Guernsey audience has heard.
A 1970s-style global recession caused by rising inflation rates is an unlikely outcome for the world’s economy as signs of a more stable environment start to emerge, according to the Head of Research at Julius Baer.
Christian Gattiker was addressing a Guernsey audience via video link for the Swiss wealth management group’s bi-annual Market Outlook event. Christian said that inflation remains a problem globally, but the US has already witnessed its peak and Europe will soon follow; current projections suggest that inflation will peak in the UK around September.
However, Christian did warn that inflation rates are unlikely to return to low pre-crisis levels.
The global picture is a volatile one, caused by the conflict in Ukraine, the expectation that central banks will start to reduce their balance sheets, and economically costly lockdowns in China. But there are signs of positivity for the economy, as Christian outlined: “There are certainly causes for concern, but we’ve performed a fact check that reveals optimistic data as well,” he said. “In the US, Q1 output was strong and consumer demand is still there. Savings and bank deposits rocketed over the last couple of years so spending increases are entirely possible.
“Central banks may have over-stimulated their economies during the pandemic, but they’re expected to act to try to combat inflation, with interest rate rises anticipated from the Fed in the US and the Bank of England closer to home.
“Furthermore, the labour market is very healthy with job openings increasing hugely since the pandemic and wages also going up, albeit not quite keeping pace with inflation. We also expect that the pressure on the global supply chain – a major contributor to inflation – has peaked and that situation will improve.”
Difficult but not impossible for investors
Craig Allen (pictured), Head of Investment Management for Julius Baer Guernsey also spoke at the event and provided the backdrop to a difficult period for investors.
The volatility of markets and the poor performance of bonds have both contributed to losses among many investment portfolios, but Mr Allen said that this is not unprecedented: “These kind of performance drops have happened several times before,” he said. “That doesn’t make it any easier, but it does indicate that recovery is normally just around the corner.
“As recently as 2020 we saw portfolios suffering in the wake of the initial outbreak of COVID-19 but recover very quickly after the end of March that year. We are currently in a dip but, as Christian has outlined, there are some causes for optimism.”
Craig said that investing in high-quality stocks and thinking longer term are sensible moves in a volatile environment: “For risk-averse investors, investment-grade bonds are currently an attractive option. These are bonds issued by high-quality companies that are extremely unlikely to default. These are offering around 4% yields, which is better than holding cash – the traditional preserve of the conservative investor.
“Higher-yielding bonds are also out there – in the US, some emerging markets and contingent convertibles (the lowest-rated bonds of the highest-rated banks) especially. Equities are struggling but there are some cheaper companies worth having a look at, especially in sectors that continue to boom, like healthcare.
“With valuations currently down about 20% year-on-year, there is a chance to play the long game and buy good-quality stocks at valuations that are cheaper than six months ago. Companies such as Microsoft and Apple have good balance sheets and have performed well, but their value has been hit by the general stock market decline.
“We’d always advise clients that diversified global portfolios are the best way to structure their investments, and that’s especially true in a volatile market. Most people invest for the long term so shouldn’t worry too much about short-term dips like we’ve been in for the past few months.”