The current context in which investors and market operators find themselves operating is “very complex and very open”. This is the opinion of Filippo Casagrande, Chief of Investments of Generali Investments, who observes how “structurally” the world is moving towards disinflation, while “geopolitical evolution” and “cyclical factors” can “push in the opposite direction”, i.e. stagflation.
Given the situation, savers should “remain flexible to various different scenarios,” Casagrande suggests, remaining “not too exposed to the world of long-term interest rates” and maintaining geographic and sector diversification in the stock market.
Inflation is scary
In the short term, “the basic scenario is that of a ‘fragile truce’: the de-escalation has supported a strong rebound in risky assets but, even in the absence of a resumption of fighting, we are faced with a prolonged closure of the Strait of Hormuz”, underlines Casagrande who recalls how the closure of the Strait has limited the global supply of energy goods, pushing oil prices above 100 dollars, and puts the circulation of essential goods for the food chain, such as fertilisers, into difficulty.
“The rise in global prices of energy and food goods is already having an impact on consumer prices and the purchasing power of families. While in an initial phase consumption can remain sustained thanks to the reduction in savings rates, a prolonged crisis would lead to a more marked slowdown in domestic demand, with a non-negligible risk of recession in the regions and countries most sensitive to energy imports, primarily Europe and Italy”, comments the Generali Investments expert.
Interest rates
“The risk of a stagflation scenario can have a significant impact on monetary policies,” warns Casagrande. On the European front, the market almost assumes three rate increases by the ECB, which however “would have a negative impact on growth in the short and medium term”. For the moment Frankfurt is on the sidelines, but in the latest statements one can perceive “an already less accommodating tone”.
“The ten-year Bund rate is just above 3%, a historically very high level, given the upward repricing of inflation expectations,” points out the Generali Investment expert.
Overseas, the market has “entirely removed previous expectations of 2026 rate cuts” from the FED. It should be noted that overall inflation has already exceeded 3% on an annual basis “but, for the moment, core inflation shows a decreasing, albeit slow, trend”.
“This should limit further upward pressure on market rates, with a ten-year Treasury rate already hovering around 4.40% and with 30Y above 5%.”
Particular attention is given to British bonds, “with the 10-year Gilt rate already above 5%, with historically wide spreads compared to Bunds and US Treasuries”.
“Very selective” approach preferred
The recent rally “suggests caution in attempting to anticipate a further upward leap in stock prices”. Galvanized by the good performance of corporate profits (especially in the USA and in the technology sector), the markets “seem not to see the downside risks to growth resulting from an inflationary spiral”.
The key is to understand whether “the tech sector is facing a bubble”. Despite good corporate profits, phases of volatility cannot be ruled out, “especially for those stocks with extremely high valuations and with difficulty in financing with their own resources the investments necessary to compete in the race for Artificial Intelligence”.
Generali Investments’ attention to “strategically important sectors for the domestic economy”, such as banking and defense in Europe, as well as gold stocks and utilities, has been confirmed.
On the rates front, Generali Investments adopts a “neutral approach on duration”, but with “active management to manage volatility around current rate levels, which are historically high”.
Looking in particular at the BTP market, it must be taken into consideration that “Italy is more sensitive to energy shocks”. Consequently, “in the current context it is difficult to review in the short term the minimum spreads seen in the first part of the year. Likewise, the good management of public finances in recent years reduces the risks of a significant widening of spreads”.
