Monetary policy

Policy normalization is in motion but the pace won’t hold

16 March 2022
Publication · Reading time: 4 minutes

Monetary policy

This article was first published in French at

Inflation has been a hot topic for several quarters. At first, markets have been expecting a short-lived effect on the economy guided mainly by the Fed, who characterized inflation as temporary ‘transitory’. At GMG, we however took the opposite view as early as July 2021 and quickly identified that inflation will be higher in this business cycle than in the previous ones.

Prior to the start of the Russia-Ukraine war, we believed inflation upside surprises would begin to fade as high-frequency growth data began to reveal a softer growth outlook.

In June, we identified that inflation will be higher in this business cycle than in the previous ones.

Now with war taking place in Eastern Europe, the growth has become much more complex and uncertain and especially so given both Russia and Ukraine are large commodity exporters. Thus, the inflation outlook has dramatically changed—worsened—but it is anyone’s guess for how long.

We believe the risks have significantly increased for cuts to the global growth forecast, especially for European countries. High-frequency economic indicators were already suggesting slower growth for the months of January and February, mostly due to the continued spread of the Omicron variant and persistent supply-chain disruptions.

Evidence of diverging economies and policies were surfacing before the war was started and is clearly more apparent now. In our 2022 outlook, The Great Transformation, we introduce our concept of the four forces transformation—divisions, divergence, disruptions, and debt—reshaping the world and markets in general. We expected growing divergence in economic performance as well as growing political divisions.

we find the present market environment offers prime conditions for increased market turbulence and performance dispersion across asset classes.

Now data and events are clearly bringing to the surface the divisions and divergence, thus creating tremendous disruptions. Growth and inflation are moving at very different speeds across all regions. We believe this will continue but that growth will not be derailed. We remain constructive but urge extra caution and greater care is needed in selecting investment strategies given the divisions, divergence, and disruptions, in a world with historic debt burdens.

Regarding monetary policy, we believe that the journey towards policy normalization may create market turbulence. However, we expect that policy normalization will be very slow and gradual, not as aggressive as currently priced in markets. Thus, we find the present market environment offers prime conditions for increased market turbulence and performance dispersion across asset classes.

Our positioning remains a mild ‘risk-on’. The monetary and fiscal policy backdrop remains ultra-supportive and there are still massive amounts of liquidity in most regions. Therefore, while there is heightened concern about the state of the world today, the combination of growth and supportive policies allows us to remain very selectively invested.

Recent portfolio adjustments made in mid-February include reducing our fixed income underweight and equity overweight. In addition to our already strong gold overweight, we added broad commodity exposure on the thesis that geopolitical issues and the bifurcation taking place (i.e. the world forcibly moving from unipolarity to bipolarity) will cause sustained upward pressure on many commodities. While inflation risk has forcibly resurfaced, given the global solidarity witnessed in support of Ukraine, it is also likely that the global solidarity may force greater cooperation across all spheres of policy including national commodity strategies. Whether it is crude oil, LNG, or wheat, an urgent reconfiguration of global trade and supply chains is likely, thus limiting upside inflationary pressure in the medium term.

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 contains generic recommendation.

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 purpose.

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.

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 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:

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