“We’re not talking about a recession or anything of that sort. But we’re going to grow at 5.5% to 2.5%. That might sound small relative to 5.5%, but it’s still going to make a difference to the US economy.” There is a huge momentum with growth. Remember this economy is $22 trillion, so 2.5% is above where you want in terms of growth,” he said. Noting that the US is not enforcing so many shutdowns And he hopes there won’t be more pandemic waves, he said, adding, “I think we’re ready for a good runway here.”
Emerging markets, meanwhile, “didn’t have the luxury of closure, so they have higher-quality herd immunity than some of the developed worlds and would be able to navigate through recovery,” he said.
While emerging markets may have more resilient activity in 2022 and 2023, Franz said the fact that central banks will tighten and reduce liquidity is generally not a great set-up for emerging markets. Still, he said Capital believes that “there are a lot of unknown opportunities in emerging markets, but you have to be very careful.” He also noted that these are not the same emerging markets as 10 to 20 years ago because they are much more knowledgeable and have better institutions. While some countries are still wild cards, their institutions have learned a lot from the past to navigate this recovery. So,” he said, “we’re looking at everything: every country, every region, every region, every company, there’s hope.”
Franz said the Federal Reserve Board and its chairman, Jerome Powell, are now also saying that 7% inflation is a bit high and “moving very quickly,” so the market price has gone up. Meanwhile, the recent Consumer Price Index (CPI) showed prices are moving across multiple ranges, so he said this is “worrying for the Fed. I think they’ll have to raise rates a little bit faster.” The risk, then, is that rates are raised faster than the market expects, but this may be necessary to balance aggregate demand and inflation in order to strike a balance with supply. Franz said the Fed could help slash inflation to 2 to 3% by January 2023, which would lay the groundwork for inclusive job growth and draw more people into the labor market.
As for fixed income and hedging against inflation, Franz said that, given the uncertainties of what might unfold, “you want the ballast in your portfolio to check the risk as the Fed goes too high or too low.” If it does too much, you have a big slowdown in your growth. If it does too little, you have a big increase in inflation. So, in terms of allocation, you just want to know that They exist and be prepared for them.”