Countering volatility with flexible solutions and covered bonds

Economic outlook and thus market environment remain uncertain. Sebastien Galy of Nordea Asset Management ranks the economic outlook for different regions and explains the tactical and strategic opportunities investors can take advantage of.

Global economic growth is slowing. Markets have already priced in much of this slowdown, yet the economic outlook remains uncertain, with analyst estimates ranging from soft landings to recessions. For investors, however, this challenging environment also offers tactical and strategic opportunities, says Sebastien Galy, Senior Macro Strategist at Nordea Asset Management.

Central banks have responded to increased inflation by tightening monetary policy. Together with slower economic growth, this should have a lowering effect on inflation. Still, there are some supply-side factors that could keep inflation under pressure, Galy explains: "These include current supply chain bottlenecks, continued or renewed Covid-19 lockdowns, a slowdown in the housing market, and Russian retaliatory measures such as curtailed natural gas supplies, among others."

Disappointing corporate earnings expected in Europe

He said the European economy was suffering particularly badly under these conditions. However, the strategist expects at least energy prices to calm down to a certain extent. Although these could rise further against a backdrop of limited supply, they should stabilize back at lower levels as the economy limps along. This should also ease the pressure on supply chains and lead to relief at ports, for example.

"As a result, corporate earnings growth is likely to disappoint from a subdued level, while investors learn to be more patient and focus more and more on a moderate long-term growth path", says Galy.

In the USA, a whole range of economic scenarios is possible, the lack of historical examples and non-linearities make forecasting inflation and growth very difficult. On the one hand, household savings are falling, so they have to borrow more. On the other hand, once the Fed intervenes, inflation should ease, boosting both real incomes and consumer spending. Accordingly, a decent economic growth, a stagflation or even a recession is possible.

The economic trend in China is much clearer, he said. The zero-covid policy led to severe economic restrictions – but these should steadily decrease. The crisis in the real estate market, which is an enormously important pillar of the Chinese economy, is at least as important. If the real estate market falters even further, China is likely to face difficult times.

Focus on flexible solutions

What do these circumstances mean for investors? "Large technology companies tend to price in long-term economic growth and innovation that is currently being challenged", according to Galy. Still, there are opportunities in this area. Chinese companies are particularly interesting in the context of climate change, as they produce the majority of green tech solutions. In addition, select tech and disruption stocks should benefit as fears of a rapid global economic slowdown subside.

Value investments in combination with quality such as Coca-Cola and Air Liquide are currently less volatile, he said. But above all, Galy advises diversified flexible solutions: "Listed infrastructure and real estate should continue to help hedge against inflation," he says. The same applies to the defensive characteristics and alpha capabilities of covered bond strategies. Such a complex environment is also a reminder of the long-term value of ESG."