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Even if inflation has peaked, many fixed income investors appear unconvinced it will quickly return to the Fed's long-run target of 2%.There have been anecdotal signs in some markets that price pressures are easing – such as a slowdown in home price appreciation and cooling demand for labor – but clearer evidence is needed. Some investors now question whether inflation has already peaked.Inflation can trigger a growth shock, given that (1) higher energy and food prices are, in effect, a tax on the consumer, who are the main engine of global economic growth (2) with interest rates rising, continued earnings gains will be needed to support positive equity returns, but higher wage and input costs could cut into profit margins and (3) inflation raises the risk that the Fed will hike rates too aggressively, increasing the cost of capital and causing a recession.INFLATION RISKS AND NAVIGATING ECONOMIC HEADWINDS Treasuries and other sovereign bonds didn't offer many diversification benefits in the first half as correlations with equity returns soared, repeating a pattern seen in recent years. Rising interest rates punished equity valuations in the first half, and rising economic concerns could lead to a slowdown in corporate earnings and put further pressure on stock prices.In the near term, the war will likely continue to impact global commodity markets, keeping food and gas prices high, but over the longer term it could accelerate the shift to renewable energy.The war in Ukraine, COVID-19 lockdowns in China, and central bank monetary tightening are likely to keep the investing environment difficult.Key takeaways for the second half of 2022 include: Justin Thomson, Head of International Equity and Chief Investment Officer.
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