It’s Peak Time; Inflation, Rates, Geopolitical Fragmentation, Uncertainty and Pessimism

Market Insight by Belal Mohammed Khan
Published on 7th June 2023


  • In our previous month review titled “Broadening State Support is Supportive of Risk Assets” we highlighted that the risk environment and outlook had improved.


  • This positive shift in our view was primarily driven by actions taken by authorities to address and support their respective banking sectors. Additionally, we emphasized that targeted fiscal policy programs implemented in major economies would contribute to economic growth.


  • Building upon this constructive view, we now anticipate the occurrence of what we are calling ‘Peak Time.’ A time of peak inflation, rates, geopolitical fragmentation, uncertainty and pessimism.

Portfolio implications – In our base case scenario of ‘Peak Time,’ it’s time to further add to our selective risk-on positioning, and reduce allocation to risk-off, defensive holdings.

It’s Peak Time

Our ‘Peak Time’ base-case scenario is built on the premise that the recent headwinds to the global economy and markets will begin to decay. This includes inflation, policy rates, geopolitical fragmentation headwinds, general uncertainty, and pessimism, in general.

Although geopolitical fragmentation noise will continue, we anticipate it will occur slower, less intense, than in the past three years. Instead, we will likely witness a more pragmatic approach, as the US Secretary of the Treasury highlighted in April 20. The Secretary stated, ‘While we will assert ourselves when our vital interests are at stake, we do not intend to completely separate our economy from China’s. A complete separation would have disastrous consequences for both countries and destabilize the rest of the world. We recognize that the health of the Chinese and US economies is interlinked. A growing China, abiding by the rules, can be beneficial for the United States.’ In light of this perspective, we expect the need for pragmatism to moderate geopolitical fragmentation, which is similar to the message from European Commission President Ursula Gertrud von der Leyen in her April 6, 2023, statement1 where she stressed the need to “de-risk, not to de-couple,” from China.

Although tensions and stress are likely to persist, we anticipate a diminishing marginal impact of news related to geopolitical fragmentation unless the news or event is exceptionally harmful. Thus peak fragmentation has arrived, and related uncertainty should fade somewhat, enough to ease investor fears.

Our ‘Peak Time’ Scenario; Looking for Uncertainty Decay

The Macro Outlook

The global economy continues to move at multiple speeds across and within economies, generally, with a few exceptions. Manufacturing continues to soften while services remain resilient or even robust in some economies. Such an economic backdrop will allow further performance dispersion across countries and sectors. While we anticipate a further deceleration in economic activity in the near term, primarily due to tighter monetary policy on a global scale, we do not consider this economic outlook necessarily negative for select risk-on assets.  The growth outlook must be evaluated within the context of potential policy options, both fiscal and monetary. In the current slowing growth environment, we believe inflation has likely peaked, and so have policy rates. Thus, policy tightening must pause, which supports select risk assets.

Beyond the six-month horizon, an improving macro backdrop may surface. In the April WEO, the IMF growth projections have the global economy improving from a projection of 2.8% in 2023 to 3.0% in 2024, with most of the growth coming from emerging and developing economies, 3.9% vs. 4.2% in 2023, 2024 respectively while advanced economies projections call for growth of only 0.1% year-over-year, 1.3% 203 and 1.4% in 2024.

Considering our base case scenario of peak inflation, rates, fragmentation, and pessimism, growth and inflation risks skewed to the downside, suggesting that there is a growing possibility of monetary policy shifting from restrictive to expansionary within the next twelve to eighteen months, a supportive factor for the longer term.

Global Economy Expected to Improve, Unevenly 

Source: GMG, IMF Data April 2023 World Economic Outlook

List of Monetary Policy Lags

Investment Strategy:

Indeed, no doubt, the investment environment is complex.  However, our ‘Peak Time’ base case scenario calls for peak inflation, policy rates, geopolitical fragmentation, uncertainty, and pessimism, and therefore we have been gradually stepping back into select risk-on assets.

We expect economies to slow in the near term, uncertainty to decay, and fade. Simultaneously, with our peak policy rates call, there should be no further intensification of monetary policy headwinds in the near term. This is likely followed by a gradual and modest monetary policy easing beyond the twelve-month horizon.

In our tactical asset allocation positioning, we maintain a modest overweight in cash, conservative underweight in fixed income, equities at a strong overweight, commodities overweight, and favor the U.S. dollar.

  • In fixed-income, we maintain a cautious and underweight position, anticipating a growing impact of the higher rate environment on developed market investment-grade and high-yield markets. As we expect a supportive monetary policy environment to surface in the longer term, we expect to shift our core government bond from underweight to overweight, accordingly. Within our fixed-income underweight, we hold an emerging market debt overweight.


  • In equities, we hold an overweight with a preference for large, quality companies exhibiting a growth factor bias, and our sector allocation has a mild cyclical sector tilt.


  • For commodities, as our base case calls for a gradually improving growth outlook in the longer term, we hold a commodities overweight, expecting key commodities to improve gradually. On gold, we took partial profits on our large overweight two months ago and now have a slight overweight for diversification benefits.


  • For absolute return funds, the complex macro and market environment is ideal for select hedge fund strategies such as relative value and CTA/Systemic where we hold an overweight.


  • On major currencies, we expect the USD to remain robust, benefiting from relatively high real rates and relative certainty.Please reach out for our full tactical asset allocation details across all asset classes.


US Treasuries Curve’s inflation-indexed yields; USD Supportive
Source: Board of Governors of the Federal Reserve System (US), Market Yield on U.S. Treasury Securities at 5-Year Constant Maturity, Quoted on an Investment Basis, Inflation-Indexed [DFII5], retrieved from FRED, Federal Reserve Bank of St. Louis;, May 25, 2023.1.

Important notice

The information provided herein constitutes marketing material, that may contain general information, and has been prepared by personnel in GMG 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 contains generic recommendation.

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

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