However, the inflation figures will likely be much higher than the ECB’s forecast of 1.7% for 2022 and 1.5% for 2023.
Similarly, Europe and the United States have experienced higher inflation growth, mainly due to increased demand and cost pressures in the aftermath of the pandemic. In addition, the debt and money supply of central banks has also risen following the stimulus measures carried out to mitigate the effects of the pandemic.
How does this scenario affect fixed income and equities?
High inflation and the good performance of the global economy, which will weaken especially in the US and China due to the real estate crisis, will force central banks to reduce their monetary support. Thus, the Fed has already begun to withdraw its bond purchases, so the purchase program will end in June 2022.
After that, we expect two increases in interest rates by the FED, probably in July and November. And the consequence for investors is obvious. Long-duration bonds will lose ground in an environment of high inflation and rising interest rates. On the other hand, short-term bonds will be the priority.
For their part, equity valuations are at very high levels, although considering that rates remain low, equities present more attractive investment opportunities than bonds. However, the high absolute valuation of equities means that long-term returns for the next 5-10 years will decline, and the risk of prices falling again will increase. Therefore, the long term of the portfolios will be crucial for investors.
How are the ODDO BHF Polaris funds positioned for the new year?
Artificial intelligence, the cloud and health technology are some of our favorite topics. We like quality companies that have a high return on capital and competitive advantages, that grow structurally while being sustainable, and whose shares are traded at a reasonable price.
In an environment of rising prices, companies must take care to minimize capital expenditure to support future growth and be able to pass price increases on to customers. We believe that quality securities that trade at a reasonable price will be the most favorable for investors with a long-term investment horizon.