Our core scenario is a continued recovery that broadens out and becomes more synchronised. Inflation worries provide some bumps, but monetary policy normalisation is slow. However, we remain in an unusual environment, and it’s as important as ever to keep an eye on the risks to our central view. On the positive side, inflation concerns could recede more quickly than we think as supply bottlenecks unstick, allowing central banks to remain accommodative for even longer. On the negative side, if those supply bottlenecks become more entrenched and vaccine progress falters, we could find ourselves dealing with stagflation.
Stagflation
Macro scenario
- Acute supply problems lead to unpleasant mix of weak growth and high inflation.
- Challenges around vaccine rollout exacerbate uneven nature of global recovery.
Policy scenario
- Monetary: Central banks are forced to tighten more quickly than anticipated.
- Fiscal: Debt sustainability concerns in an environment of rising rates and weak growth prompt premature fiscal tightening.
- ESG: Lack of global agreement on means to reach climate objectives leads to geopolitical tensions between US/EU/ China.
Markets scenario
- Fixed income: Bond markets challenged, with issues most acute in HY and EMD. Short duration outperforms.
- Equities: Stocks also under pressure, particularly EM and growth style. Quality value stocks relatively more resilient.
- Alts: Core infrastructure and (to a lesser extent) real estate provide best hedge against inflation. Macro funds perform, using volatility and shorter term trades.
- FX: US dollar strengthens.
Synchronised global growth
Macro scenario
- Recovery broadens and becomes more synchronised across regions. Vaccine rollout progresses smoothly.
- Supply bottlenecks continue to cause global inflation concerns.
Policy scenario
- Monetary: Normalisation is slow despite inflationary pressures – Fed and ECB taper asset purchases in 2022 but don’t raise base rates.
- Fiscal: Policy remains expansionary but pivots to medium-term infrastructure projects.
- ESG: Agreement reached on orderly path towards common carbon price, reducing need for carbon border taxes.
Markets scenario
- Fixed income: Interest rate curves steepen; US 10-year Treasury yield rises to around 2% by year end.
- Equities: Positive but bumpy environment for stocks. Rotation continues from pandemic winners to losers (tech to financials, growth to value, US to UK/EZ/JP).
- Alts: Good environment for private equity. Macro funds, real estate and core infrastructure keep pace & deliver market returns with smoother profiles.
- FX: US dollar weakens modestly.
Goldilocks
Macro scenario
- Inflation moderates quickly as supply disruptions ease and wage growth slows, despite unemployment falling. Commodity prices cool as spending tilts to services.
- Early signs that investment spending is reviving productivity.
Policy scenario
- Monetary: Central banks remain accommodative for longer. Large asset purchases continue and expectations for future rate hikes are pushed out.
- Fiscal: Low rates and strong growth reduce pressure on government cash flows, encouraging more fiscal expansion.
- ESG: Technological progress reduces concerns around the cost of the energy transition.
Markets scenario
- Fixed income: No further curve steepening; carry assets (HY/EMD) perform strongly.
- Equities: Good for equities; growth style back in favour. Earnings upgrades from stronger margins. Traditional energy challenged on ‘peak oil’/‘peak gas’.
- Alts: Strongest environment for private equity and private credit. Real estate and core infrastructure act as best shock absorbers. Macro funds leverage market beta.
- FX: US dollar weakens.
Opinions, estimates, forecasts, projections and statements of financial market trends are based on market conditions at the date of the publication, constitute our judgment and are subject to change without notice. There can be no guarantee they will be met.