Economic growth is set to decelerate more markedly starting at the end of Q1 2022. The combination of tighter monetary and fiscal policies, normalized consumer savings, negative real wage growth and high prices suggest weaker demand for goods and slowing manufacturing activity, which is unlikely to be compensated for by higher services spending. Lower goods demand should also start weighing on prices and help moderate inflationary pressures. Europe appears to be in a particularly precarious situation for the next few months, given the ongoing energy crisis combined with new restrictive measures on the back of the virus.

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Fed tightening and slowing growth will deteriorate financial conditions, creating an environment where high quality and defensive companies should be the focus of investors. The reflation trade, which favored cyclical companies, is unlikely to re-emerge in the coming months. With profit growth decelerating sharply in 2022, albeit to a still comfortably positive rate, valuations might become more of an issue, especially in the US and EU where they remain above recent averages. Japan and China have a larger margin of safety in this regard. Continue Reading

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