Aviva Investors, the global asset management arm of Aviva, expects global growth to slow to a below-trend pace over the next year and a half, with the risk of recession rising close to 50 per cent. But the absence of major imbalances and excesses that have characterised previous downturns imply that economies should be able to rebound quickly.
The global economy is still juggling with a potent combination of supply-side shocks (including the ongoing conflict in Ukraine), tightening financial conditions and the highest inflation for a generation. These are creating considerable uncertainty and volatility in financial markets and are unlikely to be resolved any time soon.
Central banks in developed economies have either raised policy rates already or signalled their intention to do so. All are increasingly focused on high inflation and the threat it represents for macroeconomic stability. Most have concluded that the low inflation backdrop of the last 15 years is probably now over. Taming inflation is now the priority, even if that has an adverse impact on growth over the shorter term.
Inflation should fall back later this year and more convincingly in 2023, but upside risks remain as earlier headwinds to price increases become tailwinds: unwinding of globalisation, geopolitics, global supply chains shifting closer to home and climate change policies.
Michael Grady, head of investment strategy and chief economist at Aviva Investors, said: “The new macroeconomic environment, the monetary policy response to it and the changing views on a range of longer-term structural factors have resulted in an extremely challenging year in financial markets.
“The heightened uncertainty around the outlook has increased both implied and realised volatility across all asset classes. As such, we prefer to have relatively light exposure at this time. We continue to have a preference to be modestly underweight duration, with upside inflation risks outweighing downside recession risks.
“Given the sharp fall in equity multiples this year, we prefer a small overweight to the asset class, apart from in Europe, where growth risks are more pronounced. We prefer to be neutral in credit, where the pricing of spreads fairly reflects recession risks. In currencies, we are long the US dollar against the Euro, given the relative outlook for the two economies.”