Markets Update April 2022 – Global Stagflation Scenario Approaching Threateningly Close

The stagflationary tendencies of recent weeks have become entrenched and are weighing on the general investment environment. As further escalation and a longer duration of the Russian war of aggression in Ukraine must be expected, the
upward pressure on commodity prices and thus inflation rates remains high for the time being. Developments in China are also having a strong inflationary impact. The government's strict zero-covid policy in the fight against a renewed wave of infection is based on rigorous lockdowns and the closure of industrial plants or ports. This once again leads to massive disruptions in supply and
value chains, which both drives up prices as the supply of goods tightens and slows down the economy as global production processes are noticeably hampered. Experience from 2021 has shown that it takes months for these disruptions to be resolved. Consequently, investors must be prepared for stagflationary conditions to persist for quite a while.

FED: Balance sheet contraction in focus

In the current situation, the global central banks, above all the U.S. Federal Reserve, are under tremendous pressure. On the one hand, the high inflation rates require a noticeable tightening of monetary policy, otherwise there is a risk of losing control over inflation expectations and thus of structural monetary devaluation. On the other hand, economic risks are steadily increasing, which significantly reduces the
scope for monetary policy normalization. Consequently, central banks are forced to undertake the most extensive monetary tightening possible in the shortest possible time. In the coming months, the Fed is therefore likely to act exclusively with so-called double key rate steps - increases of 50 basis points each. At the same time, the Fed plans to reduce its balance sheet by June at the latest, aiming for a monthly reduction of USD 95 billion in the medium term. The current investment scenario therefore confronts investors with an unfavorable mix of economic risks and restrictive monetary policy. In this constellation, the risk-return ratio of equities appears rather unattractive. Professional investors should therefore reduce the proportion of equities in their portfolios and instead focus on inflation-resistant assets such as gold and commodities.