Inflation and Interest Rates peak in sight?
So why the turbulence in markets? Higher interest rates are pushing down the ‘fair’ valuation measure that investors are willing to pay for equities, as bond yields rise and offer a potential investment alternative to equities.
That Central Banks are facing a sharp (and unexpected) surge in inflation is resulting in monetary policy tightening. It is likely that the equity market, and bond market, may struggle until investors see a peak in inflation that would then allow policy makers to ease back on the pace of tightening.
We are unearthing some, and a growing amount of, signals that point to a peak in inflation in the US. This cannot come soon enough for those waiting to be more constructive on equities in the latter half of 2022.
Some leading indicators are signalling that the inflation rate may peak soon.
Source: Bloomberg, Artorius
China being glued back together
Whilst developed market equities appear to be making new lows as their Central Banks tighten policy, emerging markets led by China appear to be undergoing a quiet recovery.
With Covid coming under control, for now, in China, and the subsequent lifting of lock downs and fiscal policy easing, investors are starting to return to emerging market equities. We remain overweight on both valuation attraction and the potential of positive policy surprise in the run up to November’s meeting of China’s Communist Party (CCP) which is marking its century this year. Weak growth is unlikely to be tolerated.
Policy and Profits
Sustained equity market progress may depend on the outlook of policy and profits. With Central Banks tightening policy, equity and bond markets have experienced double-digit falls in 2022.
We believe that there are signs of a peak in inflation pressure (at least in the US), and if this leads to the Federal Reserve easing the pace of monetary policy tightening, this could lead to a more constructive investment backdrop.
This publication is available to download as a PDF.
All expressions of opinion reflect the judgment of Artorius at 22nd June 2022 and are subject to change, without notice. Information has been obtained from sources considered reliable, but we do not guarantee that the foregoing report is accurate or complete; we do not accept any liability for any errors or omissions, nor for any actions taken based on its content. The value of an investment and the income from it could go down as well as up. The return at the end of the investment period is not guaranteed and you may get back less than you originally invested. Past performance is not a reliable indicator of future results. Nothing in this document is intended to be, or should be construed as, regulated advice. Artorius provides this document in good faith and for information purposes only. Reliance should not be placed on the information contained within this document when taking individual investments or strategic decisions. Artorius Wealth Management Limited is authorised and regulated by the Financial Conduct Authority. Artorius is a trading name of Artorius Wealth Management Limited.