Aymeric Forest, Global Head of Multi-Asset Solutions at abrdn, outlines his views on various sectors of the economy including commodities, rates & inflation, equities and volatility in markets.
Aymeric believes that the world economy is likely to grow above trend again in 2022 driven by private and public investment programs and vaccination trends, but the pace of global economic growth seems to have reached a peak. A combination of Covid delta-variant lockdowns, decelerating Chinese activity, and central bank tightening policies have helped downshift growth expectations.
Activity across countries continue to diverge as a function of tolerance for the virus to circulate and vaccination rates, both influencing policy responses. China has been slowing from the spring, and industry is now contracting, whilst US and European growth rate are only just peaking. Meanwhile, inflation rates have continued to surprise in the upside. Commodity prices remain elevated and supply chains remain affected by lockdowns. Aymeric says he now expects inflation to peak well into 2022 in Europe but the current bout of price pressures will prove transitory. This combination of high but slowing growth and sticky inflation may make it hard for central banks to normalise their policies with careful communication. The Fed, BOJ, BOE and ECB are extremely accommodative – but with the BOE much less so of late.
Divergences remain between economies
Large divergences remain between emerging economies such as India, Russia and Brazil and a few additional challenges are appearing. Firstly, the US are facing a fiscal cliff and the vote for an infrastructure stimulus package. The Fed is also expected to start tapering their bond purchase program in Q4. Secondly, the Chinese regulators continue to implement a series of interventions spanning technology to education, excessive financial leverage, and leading to reallocation of wealth across industries. Default rates are also rising, the largest being in the property sector. To some metrics, and following a 6-month period of underperformance, Chinese equity and corporate bond markets have reached fair to undervalued levels. However, careful consideration should be given for the risk-reward trade-off embodied in these asset prices. Thicker risk premium are required. Before deploying capital at risk, consideration should be given to the impact of a slowing property market and economic activity on commodity prices, on Chinese and emerging economic activity, and on their policy responses.
Aymeric believes that the commodity complex has now priced-in the global recovery of economic activity. Large performance divergences have emerged with energy markets rising, whilst with iron ore, copper, and lumber prices retraced some of their rally earlier in the year. Most commodity prices are currently above the level that would have led to a supply increase in 2018-2019, but this time, prices have had very little effect on supply. Capital allocation restrictions, environmental concerns (slowing mine openings) and general lack of investment have been responsible for dislocations. It is anticipated that the current inventory levels and supply chain bottlenecks will continue to drive future volatility. Some commodities remain susceptible to exogenous shocks like oil, natural gas, semiconductor and agriculture and higher prices for longer will contribute to stickier inflation until supply and demand adjust. A slowing Chinese property market is likely to have a negative impact on timber and iron ore. Finally, gold’s ability to provide real positive returns in the coming year may be impacted by higher US real yields as global inflation rates peak and monetary policies normalise.