Central banks will continue to prioritise taming inflation despite the potential short-term impacts on global growth, Aviva Investors has predicted.
The firm noted that central banks in developed economies had increasingly become focused on high inflation and the threat posed to macroeconomic stability, with many concluding that the era of low inflation was now over.
“The new macroeconomic environment, the monetary policy response to it and the changing views on a range of longer-term structural factors have resulted in an extremely challenging year in financial markets,” commented Aviva Investors head of investment strategy and chief economist Michael Grady.
According to Aviva, key challenges gripping the global economy, including supply-side shocks, tightening financial conditions and high inflation, are unlikely to be resolved in the near future, with ongoing uncertainty and volatility across financial markets.
“The heightened uncertainty around the outlook has increased both implied and realised volatility across all asset classes,” Mr Grady said.
“As such, we prefer to have relatively light exposure at this time. We continue to have a preference to be modestly underweight duration, with upside inflation risks outweighing downside recession risks.”
The firm suggested that below-trend global growth over the next year and a half would see the risk of a recession approach 50 per cent.
However, Aviva stated that economies had the ability to rebound quickly due to the lack of “major imbalances and excesses” seen in previous downturns.
“Given the sharp fall in equity multiples this year, we prefer a small overweight to the asset class, apart from in Europe, where growth risks are more pronounced,” said Mr Grady.
“We prefer to be neutral in credit, where the pricing of spreads fairly reflects recession risks. In currencies, we are long the US dollar against the Euro, given the relative outlook for the two economies.”
Inflation is expected to begin to ease later this year before a more convincing fall in 2023, but Aviva also warned of upside risks as earlier headwinds to price increases become tailwinds.
ANZ recently predicted that Australia’s consumer price index (CPI) would hit 7 per cent by the third quarter of the year, earlier than expected by the Reserve Bank.
The bank tipped a quarterly rise in headline inflation of around 2.0 per cent in next week’s Q2 inflation data, roughly on pace with the 2.1 per cent lift seen during Q1.
This would bring the annual rate of inflation to 6.3 per cent, up from 5.1 per cent in Q1.
Jon Bragg
Jon Bragg is a journalist for Momentum Media's Investor Daily, nestegg and ifa. He enjoys writing about a wide variety of financial topics and issues and exploring the many implications they have on all aspects of life.
