Moving frome one crisis to the next
The COVID-19 pandemic has continued to abate just about everywhere in the world – except China, where the government is sticking vehemently to its zero-COVID strategy, even if that means occasionally putting the brakes on the country’s economic expansion. The war in Ukraine is now the primary worry for investors and economic agents. The crisis could prolong the disruptions already handicapping supply chains and maintain the upward pressure on commodity prices – dampening any hopes of a swift return to normal inflation levels. It now looks like inflation will remain high for longer than expected in most countries, with a wage-price spiral possibly being triggered in places with tight labour markets. The United States is one such place – wages have been rising there for several quarters.
Persistent inflation has prompted central banks to start scaling back the emergency stimulus measures introduced at the start of the pandemic. The US Federal Reserve, for example, has already begun raising its policy rate – although it clearly waited too long to start tackling inflation, as consumer prices are climbing at their fastest pace in nearly 50 years. The Fed and other central banks are leaving it up to governments to “do whatever it takes”. Some political leaders, particularly in Europe, will probably let their budget deficits expand in order to protect low-income households from higher fuel prices. Europe is the region where the economy is the most under threat – especially if the war in Ukraine interrupts its supply of natural gas, which is essential to keeping the continent’s factories running. The US is located much further away from the conflict and should therefore be better able to withstand the geopolitical uncertainty.
We believe a conservative portfolio allocation is the most appropriate in the current climate. We have therefore shifted our equity weighting to neutral in recent weeks and are maintaining cash holdings so that we can seize opportunities as they arise – especially in the event of a military de-escalation between Russia and Ukraine. In the meantime, alternative investments continue to provide effective protection against market swings. That’s also true for commodities, where we still suggest holding a diversified portfolio composed of industrial metals, gold and energy products. In addition, firm commodity prices could bolster the currencies of certain exporting countries. In addition to the Norwegian krone, which we have overweighted for several months now, we are bullish on the Australian dollar, which is delivering above-average bond yields. Among the major currencies, the US dollar stands to be buoyed by the monetary tightening expected from the Fed in the coming months, while the Japanese yen could depreciate further due to the Bank of Japan’s wait-and-see approach.
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Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
