Stay invested but build in more resilience. The global backdrop has become more inflation-sensitive, but it is not yet a recession environment. Investors should avoid overreacting, while positioning portfolios for higher energy prices and tighter policy.
Global growth is slowing, not collapsing. The world economy entered this shock from a stronger starting point than in many previous crises. Growth is likely to soften, but the base case is still below-trend expansion rather than global recession.
Inflation is now the main market risk. Higher oil, gas and input costs are increasing the risk that inflation stays elevated for longer. That matters because it reduces the chance of near-term policy easing and raises the prospect of rates staying higher for longer.
Central banks are unlikely to ‘look through’ this shock. After the inflation experience of recent years, policymakers appear more determined to prevent temporary price pressures from becoming entrenched. That means markets may need to contend with a more cautious central bank response.
Australia looks more vulnerable than the US. The US economy remains relatively resilient, supported by structural growth drivers and a still-solid consumer. Australia, by contrast, faces a more difficult mix of slowing growth, stubborn inflation and household pressure.
Be selective about where risk is taken. Areas most exposed to higher energy costs and higher interest rates (including emerging markets, global small caps and parts of Australia ex-resources) warrant caution. Better opportunities may lie in quality fixed income and selective high-quality growth.
