Inflation in most major economies is likely to fall faster than many expect, and interest rates will drop accordingly within the next 12 months, predicts Nigel Green, the CEO of financial advisory and asset management company, deVere Group.
The prediction from Green comes as there are growing signs around the world that inflation has peaked. He noted that major economies, including the US, UK, and EU are expected to see inflation fall faster than had previously been expected over the next 12 months, highlighting three key reasons for this.
“First, there’s unlikely to be a wage-price spiral as real wages are typically going down despite the increases. Employers now seem to be holding back from increasing salaries on demand, which will help stifle wage inflation.
“Second, the time lag for monetary policies is incredibly lengthy. It takes around 18 months for the full effect of rate hikes to make their way into the economy – and that’s where we are – and so financial conditions will get squeezed even harder in the near term.
“And third, although many economies are now likely to avoid a full-blown recession, economic growth is still expected to be weak for the foreseeable future.”
Against this backdrop of inflation falling faster than expected, Nigel Green says that he expects central banks, including the Federal Reserve, the Bank of England, and the ECB, to start cutting interest rates within the next 12 months. This is why, he notes, that in the last earnings season, investors were pouring over the guidance more than usual.
“Guidance is critical as indicators show the economy is headed for a downturn and investors will be eager to know which companies are best-positioned to manage this. Guidance helps evaluate a company’s past performance in light of its prospects.
“When costs are going up, investors should increasingly be looking at a company’s and a sector’s ability to maintain margin. Investors should be paying close attention to margin because it can indicate how well a company is managing costs and competing in its industry.
“It can also impact a corporation’s ability to invest in growth opportunities or pay dividends to shareholders.”
Green concluded that investors must now consider the prospect of inflation falling faster than many have anticipated, to seize the opportunities and mitigate risks.
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