For central banks worldwide, an economic slowdown or recession will be considered a price worth paying in their battle against persistently high inflation, Aviva Investors has suggested.
The global asset manager has predicted that most developed economies will experience a recession during the coming year as central banks continue tightening their monetary policies.
“For asset markets that had become used to cheap money and unlimited liquidity, a challenging period of adjustment to the new regime will be necessary,” warned Aviva Investors head of investment strategy and chief economist, Michael Grady.
“This will take some time to play out, although there can still be investment opportunities while it does.”
Aviva noted that the extent of the looming downturn would likely be modest, with private sector balance sheets remaining robust and no need for significant de-leveraging and retrenchment.
However, the firm said that growth risks remain to the downside as the impact of high energy prices and restricted supply is felt in the coming Northern Hemisphere winter.
“The effect of the major supply-side shock following Russia’s invasion of Ukraine is still being felt, but central banks now feel they must restrict demand growth to the pace of constrained supply to counter the more underlying inflation impulse that is now compounding the impact of the energy price spike alone,” Aviva suggested.
While financial markets are currently facing a challenging situation with the combination of slowing growth, high inflation and aggressive central bank policy, Aviva has forecasted that inflation will ease in 2023.
In the meantime, the asset manager predicted that markets will remain volatile until underlying conditions switch more decisively towards normality.
“We have a preference to be modestly underweight duration, with upside inflation risks outweighing the downside recession risks,” said Mr Grady.
“We are broadly neutral equities, with the rise in real yields putting further pressure on multiples. We also expect to see downward revisions to earnings expectations in coming quarters.”
