How should you invest now that the Fed and ECB rate hikes are upon us? Alessandro Fugnoli, Kairos strategist, explains in the latest episode of his "Fourth Floor" Podcast which would be “better focused on low multiple sectors and financially sound companies".
Commodities and currencies
The correction, according to the expert, “will also involve the raw material, but it will be cyclical, not structural”. As for currencies, “the dollar will remain strong until the upward movement of interest rates has died down”.
Purgatory to return to 2%
Fugnoli considers this market phase as a sort of "purgatory”, a price to pay for inflation to return to 2% and not remain on the scene for the rest of the decade at slightly lower levels than at present.
This is precisely the mission of the Federal Reserve, which aims at a precise objective: "It is not a question of going down from 8 to 6 and then maybe to 4% and then seeing what happens and, if necessary, stopping there - explains Fugnoli - The Fed intends to return to 2% and eradicate the roots that inflation is planting in the expectations of economic subjects”.
Correction in progress
At the same time, however, the US Central Bank wants avoid the risk of another recession: the effects of monetary normalization, continues the Kairos strategist, will not be mainly seen on the real economy, but "on financial and real assets".
The correction of the values of these assets “has already reached a good point regarding the bond and stock market – underlines Fugnoli again – but it is just the beginning as far as the American real estate market is concerned”.
How long will purgatory last?
How long will this purgatory last? “Although there will be phases of market recovery, one of which is expected to arrive at the end of this year, pressure from central banks it won't stop right away, but it will stay elevated for the remainder of this year and for a good part of next year".
The restart on the horizon
And once this phase of energetic correction is over, "the markets will be able to start again, perhaps as early as the end of next year, having a solid and long-lasting bullish bias – concludes Fugnoli – In this transition phase it will be necessary avoid falling into the temptation to buy too soon the more speculative components of the bond and stock market”.
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