Nine in 10 believe that central bank policy will be the biggest market driver over the next six months, the survey shows.

The survey covered 34 market strategists, portfolio managers, research analysts and economists at Natixis Investment Managers and 15 of its affiliated investment managers, as well as Natixis Corporate and Investment Banking.

The strategists see energy prices (76 per cent), food prices (64 per cent), and wage hikes (61 per cent) as the top three drivers of inflation.

Seven in 10 also rank inflation as the biggest market risk for the second half of the year. Even though it has tapered slightly since its high, 36 per cent of respondents go so far as to set the level of risk due to inflation as 10 out of 10, the survey reveals.

“Ten years of over-reliance on easy money led to significant outperformance for growth equities. That’s over for the foreseeable future. The biggest market driver at the end of 2022 will be central banks and bringing down inflation to lower the longer-term cost of capital,” said Katy Kaminski, chief research strategist and portfolio manager, AlphaSimplex Group LLC.

Almost six in 10 also believe that value will continue to outperform growth for at least a few more months, the survey shows, while 24 per cent think that value will be on top for a few more years. 

Recession
Faced with prospects of rising interest rates and tighter monetary policy, strategists place recession as a close second on the list of concerns, with 64 per cent ranking it as a top risk.

Policymakers have many tools at their disposal to address inflation and, given the challenge of achieving the right timing for policy implementation, the margin for error is slim, the respondents said.

For many, the question remains as to whether these efforts will thwart inflation, trigger a recession that could last two to three quarters, or result in stagflation that lasts for years. With all the possible outcomes, more than half of those surveyed also cite a central bank error as a key risk.

“The word recession is casting a long shadow over the markets, but in some ways the only way out of this inflationary environment is for central banks to trigger this recession. Then we’ll come out on the other side of the inflationary shock, and the markets could then rebound,” said Mabrouk Chetouane, head of global market strategy, Natixis Investment Managers Solutions.

Inflation, recession and central bank policy may factor prominently in their views on market risks. Yet strategists also see the potential for world events, such as the war in Ukraine, as key risk considerations as 65 per cent of those surveyed place geopolitics as a top risk and, as an offshoot, nearly half of those surveyed see energy prices as a significant risk for markets in H2.

Bond markets
One of the biggest changes to the investment landscape over the first six months of 2022 has been the slow and steady increase in interest rates, with bond yields following in step, the firm said. After closing out 2021 at 1.512, a series of rate hikes – including a surprise 75 basis point hike in June – put yields at 2.975 on 30 June 2022.

Underscoring just how closely they will be watching central bank policies in the second half, 73 per cent of those surveyed believe there will be more increases: 36 per cent believe that US Treasuries will finish the year somewhere between 3 per cent and 3.5 per cent. The same number anticipate even more hikes and forecast rates reaching above 3.5 per cent by the year’s end.

“This year, the global bond markets suffered unprecedented losses, and few people would have ever thought of bonds as unprotected money. But there are signs that we’ve passed the high of inflationary pressures, and now is the time to find the opportunities out there, for instance in financials, energy and industrials,” said Adam Abbas, portfolio manager and co-head of fixed income, Harris Associates.

As strategists view this new fixed-income landscape there is no clear consensus on what it means for investors. Rate hikes may continue to depress bond values according to 27 per cent of respondents, creating attractive opportunities for those who know where and how to look.

Strategists see a world that has changed dramatically in the past six months. After a decade in which the easy money provided by quantitative easing, low rates, and low inflation propelled markets to positive gains in seven out of 10 years, the world is moving on. This next normal is marked with greater volatility and greater uncertainty. The big question for most investors may well be how long will it last?

The Natixis Center for Investor Insight is a global research initiative which focuses on the critical issues shaping today’s investment landscape. Based in Paris and Boston, Natixis Investment Managers has $1.3 trillion assets under management.

(This is a repeat of a story that originally ran on Friday last week on WealthBriefing.)