The pursuit of lasting prosperity

02 June 2022
Newsletter by GMG Asset Management
Reading time: 3 minutes

market casualties

Key takeaways

  • Growth is likely to be hit as major central banks work to contain inflation
  • Inflation will take considerable time to contain and control
  • Investor portfolios need to be prepared for more turbulence
  • See our latest asset class views.

In ancient and modern times, inflation has remained one of the policymakers’ most undesirable economic problems. Once entrenched, inflation can have broad negative implications across the economy and all aspects of society, thus eroding prosperity.

Thus policymakers, in their pursuit of creating long-lasting prosperity, always fear inflation and do whatever it takes to control it. Getting inflation under control has almost always required policy actions that have short-term negative implications for the economy and markets. From a central banker’s perspective, short-term pain is acceptable in the pursuit of lasting prosperity. Take, for example, Chair Powell’s recent comments:

“The process of getting inflation down to 2 percent will also include some pain, but ultimately the most painful thing would be if we were to fail to deal with it and inflation were to get entrenched,”[1]

Similarly, Fed Chair Arthur F. Burns made a similar statement back in 1970,

“To regain a lasting prosperity, a nation must have the good sense and fortitude to come to grips with inflation. There is, however, no painless way of getting rid of the injustices, inefficiency, and international complications that normally accompany an inflation.”[2]

Thus, investors are well-advised not to underestimate policymakers’ resolve to rein in inflation and inflation expectations. In creating long-lasting prosperity, policymakers will likely make decisions that will put both the economy and financial markets at risk. There are no easy, painless solutions. Indeed, challenging and painful policy decisions are needed and presented as such but also as actions that will cleanse the economy and markets of irrational exuberance, speculative or otherwise.

Since Q2 2020, signs of speculative exuberance have been widespread, triggered by the extraordinary and historic monetary and fiscal policy response to counter the pandemic and its headwinds. Major central banks have put over $11 trillion of quantitative easing in play. The speculative exuberance or asset price inflation has been evident across all regions. For example, 2021 witnessed 2,683 IPOs, a record number of new listings, and a 178% increase over 2020, with triple-digit growth seen across all regions[3]. The global mergers and acquisitions activity was also astronomical, hitting a record high of USD5.9 trillion in total size, a 64% increase over 2020, with a deal count of over 63,000![4]. The global equity market posted a gain of over 14% in 2020 and a near 17% gain in 2021, with the largest volume of shares traded since 2004 as P/E ratios moved, in many markets, to historic levels. Signs of speculative exuberance and asset price inflation were widespread. This was, in our view, rational – not irrational – exuberance, given the policy support and the low level of interest rates, which made investments and allocations to markets a rational investor response.

Looking forward, we expect policymakers will remain acutely focused on fighting inflation. Thus, growth will decelerate further. Yet, we expect inflation to remain at levels considered problematic. Markets will continue to experience turbulence and elevated volatility. Moreover, as the inflation fighting intensifies, earnings growth will come under more significant pressure. Higher rates, slowing economies, and still elevated inflation levels will eat into profit margins.

There will be casualties in the pursuit of lasting prosperity as central bankers across the planet work to get inflation under control. The best way to manage such challenging conditions is to have a well-diversified portfolio with a preference for defensive markets and defensive allocation strategies, including hedge overlay solutions.

Important notice

The information provided herein constitutes marketing material, that may contain general information, and has been prepared by personnel in the GMG Investment Solutions SA or GMG Institutional Asset Management SA (collectively “GMG”) and is not based on a consideration of the prospect’s circumstances. This document reflects the sole opinion of GMG or any entity of the GMG Group and it may contain generic recommendations.

Non-Reliance: This document does not constitute a recommendation or consider the particular investment objectives, financial conditions, or needs of individual clients. Before acting on this material, you should consider whether it is suitable for your circumstances and, if necessary, seek professional advice. GMG is not soliciting any specific action based on this material it is solely intended for illustration purposes.

This document is not the result of financial analysis and therefore is not subject to the “Directive on the Independence of Financial Research” of the Swiss Bankers Association.

This document is neither a prospectus as per article 652a or 1156 of the Swiss Code of Obligations, a listing prospectus according to the listing rules of the SIX Swiss Exchange or any other exchange or regulated trading facility in Switzerland, nor a simplified prospectus, key investor information document or prospectus as defined in the Swiss Federal Collective Investment Schemes Act. Any benchmarks/indices cited in this document are provided for information purposes only.

The accuracy, completeness, or relevance of the information which has been drawn from external sources is not guaranteed although it is drawn from sources reasonably believed to be reliable. Subject to any applicable law, GMG shall not assume any liability in this respect.

Risk Disclosure: This document is of a summary nature. The products referred to herein involve numerous risks (including, without limitations, credit risk, market risk, liquidity risk and currency risk). In respect of securities trading, please refer for more information on such risks to the risk disclosure brochure “Risks Involved in Trading Financial Instruments – November 2019”, which is available for free on the following website of the Swiss Bankers’ Association:

Material May Be Outdated: This material is produced as of a particular date. Accordingly, this material may have already been updated, modified, amended and/or supplemented by the time you receive or access it. GMG is under no obligation to notify you of such changes and you should discuss this material with your GMG relationship manager to ensure such material has not been updated, modified amended and/or supplemented. The market information displayed in this document is based on data at a given moment and may change from time to time. In addition, the views reflected herein may change without notice. No updates to this document are planned. In the event that the reader is unsure as to whether the facts in this document are up to date at the time of their proposed investment, then they should seek independent advice or contact their relationship manager at GMG.

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