Outlook 2022 – Q3

Outlook 2022 – Q3

Rise in real rates versus high profits: let’s remain cautious

Rise in real rates versus high profits: let’s remain cautious

Whilst the first quarter surprised market watchers, the second quarter confirmed a trend that is now established: inflation remains (too) strong and rates have to rise in order to control it more effectively.

This rise in rates affects the valuation of most of the financial assets. Equities in particular have once again had a chaotic quarter, with a continuation of the downward spiral which was so costly for investors in the first quarter. Naturally, bonds have fallen in altitude (as rates have increased) and attitude (their power of diversification is now a distant memory). The “crypto-currency” and alternative solutions such as “risk premia” have also continued to fall. The second quarter has therefore ended on a very pessimistic note, and the shrewd ones are those who have found a hedge elsewhere than in cash and commodities. And yet…

And yet the fundamentals are not too bad. Growth in the second quarter should remain positive for the time being. This increase in value reflects a strong increase in inflation – which is no surprise to anyone – as well as real growth that in itself remains positive. Real growth (leaving out inflation) should in 2022 be about 3%, a clear sign that the world economy is holding up well, probably even too well for inflation to remain at moderate levels.

At this stage, inflation has become a fundamental matter for our central bankers, including in Switzerland, the United States and in Europe. Inflation is everywhere and seems remarkably persistent: the publication of the mid-June employment report also affected the markets which was expecting it to be moderate. Even though it is mainly the increase in energy prices that now explains the level inflation is at, the central banks have now rejected gloablly the doctrine of temporary inflation in favour of fierce combat against it, irrespective of its origin.

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