Rising rates, softer growth

Global growth faces a number of challenges in 2022. Weaker growth in China provides less support to the global economy and higher interest rates in the US, coupled with dollar strength, means that the world faces a higher global interest rate.

In addition, high inflation is undermining real income growth in many economies, with the potential for high energy and food prices to cause significant problems in some emerging markets especially.

In Europe, reliance on Russian energy supply means that access to energy has the potential to be an issue this winter.

Investor Insights June 2022

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  • 15 Jun
  • 15 mins

Our in-house experts share our views on the future of the economy and the themes that matter for investors.

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Two economic poles – the US and China

The outlook for growth in the world’s two largest economies continues to have a profound effect on the global economy.

China is currently facing a wave of infections of the omicron variant of the coronavirus, and social restrictions are taking a toll on the economy. Since the early days of the pandemic, China has adopted a ‘zero-Covid’ policy, seeking to eliminate cases by employing stringent social restrictions in response to even a few cases. While this has kept cases low and contained outbreaks, it has also meant frequent and far-reaching disruption to the manufacturing and service economy.

2022 got off to a rocky start in the US, with a surge in coronavirus infections. However, higher vaccination rates and a health code tolerant of high cases and hospitalisations meant this had a shorter and shallower impact on the economy. Growth in the first quarter was -1.5% quarter-onquarter annualised, but consumption spending was resilient and unemployment continues to fall.

Two Economic Poles
Energy Crunch

The Global Energy Crunch

With a renewed focus on energy availability in Europe, gas prices at record highs and the drive for net-zero targets, not forgetting the Russia and Ukraine conflict, energy has become a big issue.

Global energy demand should grow at about 2% per year over the next decade but we won’t have enough capacity to meet that. On top of this, we need to cut fossil fuel usage to meet the 2050 goal of reaching net-zero emissions but 80% of current global supply comes from fossil fuels. Given the capital intensity of renewable power compared to fossil fuel power, renewables are not an immediate or obvious solution. Plus energy policies has starved fossil fuels of capital, exacerbating shortages.

Our Investment Officer, Isabel Albarran recently met with Alejandro Velez, Senior Equity Analyst, to discuss the energy outlook.

Where virtual reality becomes reality

Technological transformation remains a key long-term growth theme. The metaverse is becoming a key investment theme for businesses as well as investors. increase of 7%, with other countries also experiencing sharp increases. How long should we expect this inflationary surge to last?

Many large retail brands are already using the metaverse to develop brand awareness and engagement and to sell virtual garments. Many top artists have performed in the metaverse and Ed Sheeran and Dua Lipa are scheduled to perform later this year.

Meta Verse Copy

 

While we expect 2022 to be a less favourable year for growth, we do not see a recession as our base case. For investors, while the growth and inflation backdrop presents challenges, opportunities remain.

The combination of a weaker outlook for growth and higher interest rates offers less support for the broad equity market, though selective sectors and regions remain attractive. While, overall, we continue to see challenges for the fixed income sector, we are beginning to see value in some issues.

Download our latest Investor Insight for more on these themes and to find out how we are currently positioning portfolios.

Important information

Any research in this document has been procured and may have been acted upon by Close Brothers Asset Management for its own purposes. The information is being made available to you only incidentally. The views expressed herein do not constitute investment, taxation or any other advice and are subject to change. They do not necessarily reflect the views of any company in the Close Brothers Group or any part thereof and no assurances are made as to their accuracy. Investments may not be suitable for everyone. Past performance is not a reliable indicator of future results. The value of investments and the income from them may fall as well as rise and is not guaranteed. An investor may not get back the original amount invested. Unless otherwise indicated, all information and opinions expressed in this document are those of Close Brothers Asset Management and are correct as of June 2022.

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