Budapest: deteriorating growth prospects, high inflation – stock markets crumble
As part of our “Portfolio Referrals” series, we ask Hungarian fund managers every month how they would put together a medium-risk, medium-term, fictitious model portfolio. Below you can read the article of Budapest Alapkezelő:
“If the money taps are opened, the shares will have to be bought,” he says. at their next interest rate meeting in May, but the 50 basis points, as Jerome Powel put it, are already “on the table”.
In fact, the central banks have maneuvered themselves into a difficult situation. The president of the Fed argued a year ago for the pass-through nature of inflation, so it’s no wonder they are now forced to rush after market developments at an accelerated pace. The U.S. labor market remains tense, wage inflation is accelerating, and the rise in commodity prices caused by the Russo-Ukrainian war has given another 40-point rise in inflation, but even more worrying is the rise in expectations. The Fed is forced to step up and need to speed up the withdrawal of liquidity (raising interest rates, reducing balance sheet total – QT). All this in a macroeconomic environment where gopolitical risks and closures imposed due to an unexpected epidemic in China are once again weakening economic growth. Moreover, both the war and the Chinese closures can be expected to push up prices further.
The question is, will the central bank succeed in tightening financial conditions at an accelerated pace to avoid a (deeper) recession? This recent period has increased the chances that monetary policy will only be able to keep inflation close to the desired target at the cost of more serious growth sacrifices, and we have seen this change in the depth of the stock market correction at the end of April: sales were affected in all market segments. Previous good tactics, such as buying smaller falls, boarding the dip, or rotating between sectors, did not actually work.
Bond yields have been rising since the beginning of the year, with stock markets weakening. The problem of price rises has also been prominent in the first quarterly flash reports published so far. Companies report significant pressure on suppliers and labor costs, so only a few companies have managed to achieve convincing profit margin growth in excess of analysts ’expectations while maintaining optimistic forecasts.
The fundamental macroeconomic and corporate outlook has deteriorated, growth risks have intensified and the outcome of the Russian-Ukrainian war is uncertain. In a weakening macro environment and overcast investor sentiment, it is difficult to line up arguments in favor of stock embarkation. The April correction may even mark the beginning of a bear market, but in the short term, over-indulgence and extreme pessimism could justify a rebound, a “relief-rally”. It may be tactical to assume equity exposure from a level close to zero in the past, but expressing that the global economic outlook may deteriorate further, it is advisable to maintain a prudent portfolio. Increasing fears of growth or geopolitical risks may soften the rhetoric of central bank policy tightening over time, so it may be appropriate to maintain advanced market bond exposure. “
Asset allocation is for information only.