US inflationary pressures and the push toward Fed’s tightening policy and China’s policy support are factors that are likely to dominate in the second half of 2022 according to a report by Stanchart.
It said that it is of the view that US inflation likely peaked in H1. However, the pace of deceleration from here is likely to be slow, with inflation settling above 6% y/y by the end-2022 (from 8% in H1) and 4% by Q2 23.
“While long-term inflation expectations remain capped, for now, new supply chain disruptions and another oil price spike could send inflation higher,” it said in a report entitled “Global Market Outlook Walking a Tight Rope”
The report said that the Fed has committed ‘unconditionally’ to combating price pressures, is likely to err on the side of the tighter policy until it is clear inflation is turning sustainably lower. Thus, we now expect the Fed to raise rates by another 150bps to 3.25% by year-end, taking the rate beyond the Fed’s ‘neutral’ level of 2.5%.
It said that as Fed policy turns restrictive, the risk of a US recession in the next 6-12 months will rise significantly. Nevertheless, a recession is not a foregone conclusion, especially given the strong US labour market. The Fed will have to walk a very thin tightrope as it tightens policy to ensure that the economy does not tip over.
China, meanwhile, is on the opposite side of the economic cycle. Chinese policymakers have clearly signalled they are willing to offer a reasonable level of policy support, leading us to believe the economy will gradually recover from the sharp downturn in H1.
On opportunities for investment, it said that it will focus on the defensive sectors in the US and EU
It said that the in Europe and the US, our sector preferences are more defensive and Value-focused.
It says that it likes financials (supported by rising interest rates and bond yields), energy (which can hedge against further rise in oil and gas prices) and healthcare (which is a defensive sector and offers value amid lower regulatory risks).
On China, it said that its preferences are more pro-cyclical compared with the US and Europe, given our more positive view on the economy and earnings adding that its preferred sector there are communications, materials, industrial, financial and energy
