Investing.com – The problem has become increasingly urgent in recent months. The war in Ukraine and the acceleration in energy prices have been injected with upward pressures that are already in place, linked to the strong recovery after the Covid virus. Moreover, the general fall in wages has also led to higher wages, first in the United States and then in Europe as well.
The energy shock is now showing its worst face. Business passes the increases to consumers, and despite the good performance of the labor market, higher prices are beginning to affect the confidence of consumers, who are dependent on significant savings accumulated thanks to stimuli or by resorting to debt. These dynamics are not sustainable for a long time and there is a fear of a marked slowdown in consumption in the coming months.
It is precisely the combination of concerns about growth and a spike in inflation that makes Filippo Casagrande, Head of Insurance Investment Solutions at Generali (BIT:) Asset and Wealth Management talk about the stagflation scenario, the phenomenon in which high inflation and general weakness of the economy or even deflation.
After timid recovery attempts in the second half of May, the restrictive turn of central banks has hit markets, both stocks and bonds, hard. On June 13, the index of European investment-grade bonds recorded the worst performance of the year 2000, surpassing records reached during the Covid crisis. The US investment grade index also posted the second-worst performance in the past 20 years. All major European and US bond indices are posting double-digit annual losses, which is unprecedented.
On the other hand, credit market expansion has been relatively contained, with higher yields in the US having more difficulty. stock markets
It has officially entered the “Bear” area, with slightly more contained corrections in the European indices, with all sectors and patterns in red. Uncertainty about how far central banks will have to and what they actually want to raise interest rates to counter inflation puts the investor in a complicated situation.
According to Casagrande, the stagflation scenario is the worst for expected returns. The bond must include higher counter rates. Risky assets and especially stocks are facing a deterioration in growth estimates, which will inevitably affect earnings.
Generali A & WM expert believes that stability again in interest rate volatility, which is currently at its highest levels since 2009 with the only exception of the Covid crisis in March 2020, is necessary for a more constructive approach towards bonds, and to stabilize the government market.
Regarding riskier assets, Casagrande maintains a very cautious stance, noting that stock market multiples have corrected from the excesses of the past few quarters caused by ultra-expansionary monetary and fiscal policies, but cannot be defined as attractive. Moreover, the expert from Generali A & WM concludes that the risk is a second correction phase associated with the bearish revision of earnings estimates, which so far have not seen any major adjustment.
This article was written exclusively by Financialounge.com for Investing.com. Each week, Market View presents original interviews with investment houses on central market topics that will be reported exclusively on our website. It does not constitute a solicitation of investment, or an offer, advice or recommendation.