2Q 2022 | Guide to the Markets
Inflation to be higher for longer
The Ukraine crisis has resulted in a sharp increase in the price of many commodities (Guide to the Markets – Europe pgs 76-79). Alongside this, supply bottlenecks are likely to persist as China imposes lockdowns to control the spread of Covid-19 (pg 13). Inflation is likely to be higher for longer (pgs 23, 24, 32, 33). This will weigh on disposable consumer incomes (pgs 20 & 40) and corporate profits (pg 66), although we expect governments to provide some fiscal support to ease the pressure (pg 36).
Interest rates to keep rising as long as growth is robust
With labour markets tight in both the US and UK (pg 11), central banks are concerned that cost shocks will feed into higher wages and inflation will become more entrenched. The Federal Reserve has signalled its intention to deliver multiple rate hikes over the course of this year (pgs 9 & 25). As long as the recovery remains robust, we expect these to be delivered and for longer-term interest rates to rise further. The European Central Bank is expected to be more patient (pg 34), particularly in the event of a more severe disruption to European oil and gas supplies from Russia.
Higher interest rates will help value stocks catch up
Persistently higher inflation is likely to pose ongoing challenges for government bonds and high-quality fixed income (pg 68). Although interest rates are expected to rise, we expect real interest rates to remain negative for some time (pg 69).
Equities should be resilient to higher interest rates as long as corporate earnings continue to grow (pgs 49 & 55), although value stocks are likely to benefit from persistent inflation and higher interest rates more than growth stocks (pg 50).