Manning the defences: the case for active management and diversification

THE global economic cycle is currently being impacted by 3 separate shocks: tighter monetary policy, an energy crisis and a Chinese economy whose prospects are clouded by the authorities’ zero-Covid policy. As a result, global liquidity is shrinking and leading indicators are pointing towards a rapid economic slowdown.

We have moved beyond a temporary price shock linked to supply issues following the rapid post-Covid economic rebound, with signs of high energy prices seeping into non-energy prices and wages. Despite favourable base effects, global inflation is therefore likely to remain sustained, with pressure now coming from food and services. Lockdowns in China are likely to produce further bottlenecks in global supply chains, adding to inflation in manufacturing inputs. In addition, with European countries considering embargoes on Russian oil imports, energy prices could rebound in the short term.

Oil demand is already declining, however, and the oil market could shift towards slight oversupply in H2 — especially if economic activity weakens. We expect Brent to settle at close to US$95 per barrel by year’s end. Anything lower is unlikely as supply capacity remains limited.