1. Tightening financial conditions and higher energy prices slow growth: the word stagflation has returned to daily usage as oil prices have exceeded USD 100. Slower economic growth is to be expected, but oil prices need to stay high for 3+ months to really weigh on growth. Too early to properly estimate the ultimate hit to growth, we maintain a Neutral rating on stocks.
2. Higher energy prices will have long-term impacts: even in the event of a de-escalation in Iran, oil & gas prices will not return to pre-conflict levels and will retain a higher enduring risk premium. But as governments need to maintain debt sustainability, expect financial repression actions to cap long-term bond yields.
3. The ECB should not raise rates 3 times this year. Current interest rate market pricing suggests a 2.7% ECB deposit rate by December on the back of resurgent inflation. Given the rise in the 10-year German bund yield to nearly 3.1%, we upgrade core eurozone sovereign bonds to Positive, preferring 5-year maturities.
4. Stocks in energy-rich countries should do well. Given the need for energy-importing nations to source more oil & gas from outside the Middle East, we favour Canadian, Latin American and Norwegian stock market exposure, as higher energy profitability should benefit other sectors.
5. The correction in gold is a buying opportunity. Gold has surprisingly fallen 14% in March to USD 4,570/ounce, weighed down by a stronger USD, higher rates and profit-taking. Long-term drivers have not changed: we remain Positive on gold with a USD 5,500 12-month target and turn Positive on silver with a USD 90 target.
Edmund Shing
Chief Investment Officer
