Natixis IM: How will the energy price surge affect investors and their asset allocations in equities and bonds in the short term?

Mabrouk Chetouane, Head of Global Market Strategy, Solutions, International at Natixis Investment Managers discusses how the energy price surge will affect investors.

The increase in energy prices over the past 12 months (+28.5% for the WTI[1]) and their current level start to concern investors. Both the normalization of the sanitary conditions and the substantial fiscal stimulus have supported demand and maintained upward pressures on global headline inflation. As such, it is fair to assume that, even if we see some sort of “de-escalation” on the Russian-Ukrainian front, prices are likely to remain underpinned for some time. Especially given the following factors: first, the global growth should remain solid this year; second, political risks are still playing out; and third, low inventories coupled with weak capex in the energy sector. Moreover, should energy prices keep increasing, it is more likely they would trigger second round effects, which would be reflected on core inflation figures (excluding volatile components).

Against this background, pressure has increased on central banks, whose role consists in smoothing economic cycles, to raise their policy rates more than expected. Financial conditions tightening combined with higher inflation impact negatively households and companies’ income. Thus, although policymakers remain ultimately data-dependent, the risk for a yield curve is flattening tilted to the upside. In this context, risky assets may suffer, and bonds may not offer their usual protection to portfolios. Thereby, in order to protect portfolios from this adverse scenario, especially in the short term, we increase the inflation break-evens exposure, underweight sovereign bonds and equities, while maintaining a value bias in portfolios.

[1] Sources: Refinitive and Natixis Investment Managers calculations

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