Macro Fundamentals Support A Risk-On Position
The new year has started with significant volatility, as central bankers make clear a shift in monetary policy that has seen long rates move sharply higher and questioned asset valuations. Assessing macro fundamentals today, we see a picture that is largely supportive, especially for growth assets: global growth has been stable at a robust level for some time, and inflation pressures are showing signs of stabilisation (if not reduction). While we expect monetary policy to normalise as policymakers contend with the inflation they were apt to dismiss just a few months ago, we do believe an easing of inflation later this year will rein in aggressive policy action. At the same time, the omicron variant looks less virulent than initially feared, and this fading risk should support our positive medium-term view.
Positivity
What’s Next?
Global growth is solid and stable
During the third quarter of last year, we saw a significant drop in economic growth as many of its supports faded without a strong consumption recovery. At the time, the deceleration was led by easing demand from the US and tighter policy slowing growth in China. However, since the fourth quarter of last year, global growth looks to have stabilised above potential, with a modestly improving picture in both US and China. Figure 1 shows the evolution of our two systematic indicators tracking global growth, the Nowcaster and Newscaster. Both of these indicators had fallen significantly from their July 2021 peaks but stabilised more recently. Importantly, the Newscaster, which is intended to be more reactive by incorporating news articles about the economy, has dipped again, following the Fed U-turn. The Nowcaster has seen most of its components decline and level off around potential, with the notable exception of Employment, which has steadily risen since October 2021.
Figure 1: Global Growth Indicators
Source: Bloomberg, Unigestion. As of the 12.01.2022
Lofty inflation pressures showing early signs of easing
Inflation has become the key macro topic over the last few months, shifting from a “transient” phenomenon to one that central bankers now have in their cross-hairs. Wednesday’s US CPI print of 7% y/y was the highest in 40 years but matched economist estimates. Investors had apparently already priced in these inflation rates, as the market reaction was quite positive: bonds and equities both rallied, credit spreads tightened, and commodities continued moving higher. While there is no doubt that inflation pressures are still with us, we do expect them to subside over the course of this year due to easing supply bottlenecks, normalised demand, and the unlikelihood of prices surging as much as last year. Figure 2 shows our Global Inflation Nowcaster and its underlying components, most of which have stabilised at these historically high levels.
Figure 2: Global Inflation Nowcaster and Its Components
Source: Bloomberg, Unigestion. As of the 12.01.2022
The US ISM report is a useful insight into the business climate, and over the last few months, there has been a turn in the Prices Paid survey: As Figure 3 shows, fewer firms report paying higher prices. While this does not mean prices are falling or set to fall in the near-term, it does indicate that a meaningful acceleration in inflation is unlikely, which would benefit many assets, once market participants adjust their expectations to cooling inflation.
Figure 3: ISM Manufacturing Report on Prices Paid
Source: Bloomberg, Unigestion. As of the 12.01.2022
Omicron variant uncertainty fading
At the end of last year, we viewed the emergence of the omicron variant as a market stress episode rather than a genuine macro shock: there was too much uncertainty about the variant, its severity, and its resistance to the vaccines to make a clear call on its impact on the macro-economy. However, over the past few weeks, some of that uncertainty is clearing to the benefit of markets: while the variant is highly transmissible, even among vaccinated people, it looks to be much less severe than the previous variants. Figure 4 charts the week-over-week growth in confirmed Covid cases and deaths, where the deaths have been lagged by two weeks (given the typical time delay between diagnosis and death), for both the world and South Africa. As the two charts make clear, the explosion in cases has not led to an explosion in deaths (and indeed hospitalisations). While the sheer number of sick has been a drag, as many people need to stay home until they recover, it looks unlikely to have a more meaningful impact on economic growth and could even be a way for the pandemic to become an endemic. Taken within a context of healthy growth and the prospect of cooling inflation pressures, we believe the macro case for an asset allocation favouring risk, especially geared toward growth, should perform well in the current environment.
Figure 4: Covid Cases and Deaths
Source: Bloomberg, Unigestion. As of the 12.01.2022.
Unigestion Nowcasting
World Growth Nowcaster
World Inflation Nowcaster
Market Stress Nowcaster
Weekly Change
- Last week, our World Growth Nowcaster was steady as marginal improvements in US and Chinese data were offset by a slower growth impulse in the Eurozone.
- Our World Inflation Nowcaster was steady, with most countries displazing high but stable inflation pressures.
- Our Market Stress Nowcaster was slightly down over the week, as volatilities fell and spreads tightened.
Sources: Unigestion, Bloomberg, as of 13 January 2022
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