investment insights
Rates, recession, risk: building portfolio resilience
Lombard Odier Private Bank
Recession risks have increased. Global activity is slowing in response to the most aggressive interest rate hikes in decades.
As demand slows and supply disruptions improve, price rises for goods are slowing. But the cost of services is increasing, keeping inflation uncomfortably high.
In the US, strong wage growth and a tight labour market will need to adjust before the Fed can ease off the pace. If its monetary tightening proves enough to curb inflation in the coming months, we expect rates to peak around 4.5% and stay there for most of 2023.
The Fed’s inflation fight comes at a cost. We expect a recession, and for US growth to fall to around 0.5% next year, as unemployment rises to at least 5%. If policy rates rise to 5% or beyond, then the contraction could be much more painful.
The energy crisis remains an issue across the world, but especially in Europe. European authorities have been hard at work sourcing alternative energy supplies and providing policy support. While this should help avoid a full-scale crisis this winter, recession looks inevitable.
In China, the fiscal and monetary response is strengthening as growth slows. The property sector and the zero Covid strategy remain major headwinds. But we expect some easing on the latter after the Communist Party’s 20th National Congress. China is the last pandemic reopening story, with scope for a major growth rebound in 2023.
The world faces unparalleled economic challenges, and central banks have little margin for error. More volatility is inevitable. But the risks of recession do not yet look fully priced into all asset prices. Interest rates will continue to drive asset returns, and as central banks tighten monetary conditions further, a deeper economic contraction is more likely.
That’s why we have reduced risk in our clients’ portfolios to a more defensive level. Central banks’ fight against inflation will test markets, shifting risks and opportunities, as new geopolitical and economic equilibriums emerge. We keep a strong focus on quality assets, to strengthen portfolio resilience.
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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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