Vontobel Multi Asset Boutique

Investors’ Outlook: A Corona to celebrate the end of Covid? Not quite yet

Dan Scott

Dan Scott

Head of Vontobel Multi Asset

Meet Dan


| Read | 2 min

Key takeaways

  • Hopes of putting the pandemic to rest are marred by China’s new lockdown measures, the strictest ever seen
  • The US Federal Reserve has embarked on a journey of steep rate hikes
  • No let-up in Russia’s aggression in Ukraine
  • Economic prospects have darkened but the danger of stagflation or recession appears limited so far
  • Equity investors should concentrate on US and Swiss stocks in terms of regions, and (high) quality in terms of style.
  • Exposure to commodities and gold also advisable for inflation protection

Just when we thought we could raise a bottle of Corona beer – or a glass of Tsingtao, for that matter – to celebrate the end of the Covid-19 pandemic, China imposed some of the strictest lockdown measures ever witnessed. There’s chaos on the streets of Shanghai, a megapolis of 25 million, with people holed up in quarantine centers or even scrambling to get some food on the table. There are also severe disruptions in the southern Chinese city’s manufacturing plants and the port, the world’s second-largest.

Meanwhile, western central banks are withdrawing monetary support to get rampant inflation under control. The US Federal Reserve is getting ready for what promises to be a hike up a steep hill, preparing the markets for a series of rate increases.

The situation in China and the US will affect global economic growth. And yes, a war in Europe is still raging. All of this leaves market watchers worried, and voices crying stagflation are getting louder. While mindful of this possibility, we still don’t see this happening, but are watching the situation closely. Likewise, a recession is not on the cards right now, but first signs of an economic contraction could appear earlier than expected if central banks step on the brakes too hard while China remains in quarantine.

Common sense may yet prevail

Much will depend on the development in the Middle Kingdom and the decisions taken in the hallways of the US Fed and its peers. Should China maintain its strict “zero-Covid” policy without cranking up the economy, things may start going sour. And if central bankers in the west remain staunch “hawks” for too long, they will help bury what economic green shoots are left. However, we trust it won’t come to that. The Chinese authorities may still come to their senses, and western central banks will be keen on getting a grip on inflation without endangering growth.

For the time being, we believe investors should position themselves for rising rates and inflation that remains relatively high. Our advice: remain faithful to equities while treading carefully, preferring the US and Switzerland in terms of regions, and (high) quality in terms of style. Remaining invested in commodities and gold also seems advisable for inflation protection reasons.

While there’s much to be concerned about, let me qualify my introductory statement: life does slowly get back to normal in many places. In my beloved Brazil, for instance, beer will have been in short supply during the long-awaited return of the Rio carnival. Even in sober Zurich, a city not usually known for partying, the traditional rite of spring, the burning of the Böögg effigy on a pyre, resumed after a bleak two years, drawing an enthusiastic crowd. And I’m sure even investors will be able to clink glasses, or bottles, in due course.