Inflation is a primary risk for the global economy, Huw Davies, assistant fund manager of fixed income at Jupiter Asset Management, told the panel discussion at the forum.
Following Russia’s invasion of Ukraine, he also expects “regional growth pain” going forward. Europe is heavily compromised, particularly given what has already happened with supply chains, while the US and Asia look slightly divorced, but obviously will be affected by the sharp rise in commodity prices, he explained.
“I think the inflation problem is far more serious than people are really appreciating, and especially the longevity of the inflation process,” Davies said.
Echoing Davies’ view on inflation being a major risk facing investors, Paul Mitchell, senior investment specialist of fixed income at HSBC Asset Management, said that geopolitical risks must be considered by investors.
“When you have a ground force offensive surrounding nuclear power plants, that’s quite scary. That’s a new type of volatility in the market,” Mitchell said.
The geopolitical situation will make inflation higher in the short term, but the backdrop makes the tightening for central banks even tougher. And again, this will lead to a more volatile environment for investors, he added.
Mitchell also pointed out that the withdrawal of liquidity from markets is another risk which investors are under-pricing.
Unknowns
Henry Chui, head of private wealth of Asia Pacific at Nuveen, warned investors about “unknown factors” that could disrupt markets.
There is no doubt that the prolonged conflict is one of the biggest risks that people are seeing right now in global economic markets, Chui said.
However, whether it’s Russia’s invasion of Ukraine, which could spill over into a larger conflict overall, or the monetary and fiscal tightening, as well as inflation, these are factors that investors already know about.
“But I think that what we’re not accounting for are the unknown factors, such as the resurgence of Covid-19,” he said, adding that investors should keep a diversified portfolio, including different assets that would do well in different environments, and even different liquidity profiles to build resilience.
On the bright side
Aside from all the risks, Cosmo Zhang, research analyst at Vontobel Asset Management, also pointed to some potential opportunities for investors.
“In fixed income, before the second half of 2021, China was a much bigger risk than the opportunities it could offer, and that’s why we had been underweighting China bonds during the past 18 months,” Zhang said.
Now, Zhang believes China offers a bigger opportunity than a risk, especially for Vontobel AM as a fundamentals-oriented and bottom-up investor.
“Valuations don’t make sense. If you look at some of the valuation of the bonds trading in the Chinese high yield sector, even the liquidation value of some of the bonds trading at distress level should give us a very satisfactory return for the next 18 months,” he said.
