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Markets Update April 2022 – Global Stagflation Scenario Approaching Threateningly Close

Bad Homburg, 4/25/2022
by Dr. Eduard Baitinger
  • High inflation with slowed growth
  • China's zero-covid policy with massive collateral damage
  • Unfavorable investment climate for equities

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.

About Dr. Eduard Baitinger

Dr. Eduard Baitinger has been Head of Asset Allocation in the FERI Group since 2015. He is responsible for FERI's quantitative asset allocation division, where he also manages and coordinates numerous research projects. In close coordination with the FERI Board of Directors and Chief Investment Officer, Dr. Marcel V. Lähn, he also represents the FERI Group's investment strategy and its communication to FERI's clients and customers.

Before joining FERI, he was a research assistant at the University of Bremen and a financial analyst at an asset manager. In 2010, he graduated from the University of Bremen with a degree in economics, accompanied by a stay abroad in New York. In 2014, Eduard Baitinger received his PhD with distinction on new approaches for quantitative asset management. Dr. Baitinger regularly publishes in academic journals and acts as an academic reviewer.

About FERI

Founded in 1987 and headquartered in Bad Homburg, Germany, the FERI Group has developed into one of the leading investment houses in the German-speaking area. FERI offers tailor-made solutions for institutional investors, family assets and trusts in the following areas:

The FERI Cognitive Finance Institute was formed in 2016. It is the strategic research centre and creative think tank of the FERI Group. The Institute focuses on innovative analyses and the development of methods for long-term oriented economic and capital market research. 

FERI and MLP currently manage assets of about EUR 56.6 billion in the Group, including EUR 15.4 billion in alternative investments. The FERI Group is headquartered in Bad Homburg and has locations in Dusseldorf, Hamburg, Luxembourg, Munich, Vienna and Zurich.

Media relations contact

Marcel Renné

Chairman of the Board

Rathausplatz 8-10

D-61348 Bad Homburg

Dr. Eduard Baitinger