A lack of consensus on risky assets

25 July 2022

by François Rimeu, Senior Strategist, La Française AM

Equity and credit markets have suffered greatly since the beginning of the year. Following this type of correction, it is natural to consider whether or not to increase the allocation to risky assets as a whole.

Inflation

These days, getting a grasp on Inflation is not easy. A year ago, the market expected average inflation in 2022 to be 1.6% in the eurozone and 2.9% in the US, reaching a peak at the end of 2021, and in 2023 a return at around 1.5% in Europe and 2% in the US. (Bloomberg) Today, these same markets are forecasting inflation of 8.2% in the eurozone and the US for 2022 and a relative decline in inflationary pressures for 2023, with price rises still around 4-5%. Naturally, the war in Ukraine and the enormous consequences on the commodity markets only go so far in explaining these errors in estimation. We should bear in mind that if inflation estimates were revised upwards by more than 5% (see Chart 1) over the last twelve months, it is easy to imagine these estimation errors recurring, in either direction.

Chart 1 (Bloomberg):

In the short term, this leaves central banks with little choice as to what monetary policy to pursue. They want to avoid a de-anchoring of inflation expectations and will therefore continue to tighten their monetary policies with the generally assumed objective of reducing demand.

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