Fynsa
Now that the first half of the year is over, it’s inevitable that we’ll turn our attention to the remainder of 2022. In all political and economic analyses, the word that’s probably repeated most often is “uncertainty.”
The world's economies, still recovering from the pandemic, are feeling the effects of a war in Eastern Europe with no end in sight. The Chilean economy is not immune to what is happening in the world and, as if that weren’t enough, it has its own problems.
The controversial proposal for the Constitutional Convention, tax reform, and the announced pension reform, along with the low approval ratings of a government that lacks a parliamentary majority, are contributing to a situation where certainty is in short supply.
In this context, the focus in the second half of the year will likely need to be on at least two variables: inflation and interest rates. In Fynsa , we are interested in determining whether this could lead to a global recession and, consequently, what impact it would have on companies’ earnings.
Since 2008, we have grown accustomed to living with abundant liquidity, low inflation, and moderate interest rates. Everything indicates that the situation has changed and that we will have to adapt to this new reality. If inflation cannot be brought under control, the Federal Reserve Board (FED) could take a more aggressive approach to raising interest rates —which is expected to slow down the economies.
The market is grappling with the question of whether inflation has already peaked or, on the contrary, whether there is still room for prices to continue rising—meaning we’ll have to get used to higher inflation for a longer period. It’s a difficult question that, these days, few dare to answer. Although in recent weeks copper and oil prices have fallen by more than 20%, China has implemented a gradual policy to tackle the pandemic, and is below 3%, this does not seem enough to reassure central banks or the Fed. Until they have indisputable data showing that inflation has begun to ease, they will not relax their measures. Central banks in our region have not been left behind, having adopted similar measures since last year.
At this point, the goal set by the Fed has set for itself. In my opinion, 2% seems like a distant goal, whereas up to 3% appears to be a reasonable rate. The signals from Fed Governor Christopher Waller last weekend—indicating that the pace of interest rate hikes would not be accelerated—along with some signs of support for stimulus measures in China, were met with optimism by the markets.
Certain issues in the logistics and supply chain stemming from the pandemic and the geopolitical uncertainty affecting the markets cannot be excluded from this analysis. There are signs of a easing in the supply chain, warnings about inventory buildup, and a likely decline in the prices of some products. Geopolitical risk is present. The unexpected escalation of the Russia-Ukraine conflict and its impact on energy security, Sweden and Finland’s accession to NATO, and China’s desire to annex Taiwan are some of the issues that—even though we have no ability to influence them—we will need to monitor closely in the coming months.
We continue to closely monitor the Chinese government’s countercyclical economic policy, which is key to preventing a global recession. Unfortunately, the figures seem to indicate that the world’s second-largest economy is slowing down (0.4% growth between April and June), thereby threatening the global slowdown.
At this point, if one thing is clear, it is that we are facing a paradigm shift, in which the time seems to have come for Main Street versus Wall Street, and the truth is that this challenging scenario has put our clients’ true risk tolerance to the test.
