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ES Management Pte Ltd’s Associate Quarterly News Letter

Economic forecast report: 2022-2024

Central scenario over the next two years is that of stagflation: Slow economic
growth and high inflation.

With high inflation, central banks are forced to hike interest rates to combat
inflation. Years of printing money has caused inflation to hike, albeit on a
delayed fashion. US Fed target rate is expected to rise to 5-6%. With higher
interest rates, businesses will face a credit crunch and have difficulty in
accessing loans, leading to limited capital for capital expenditure and growth.
With lower profits, equity markets are expected to suffer.
Higher interest rates will also lead to higher leverage funding costs to leverage
in stock markets, forcing investors to deleverage, reduce positions and lead to
lower equity markets.

Higher inflation will favour commodities prices, government bonds and
corporate bonds, given higher interest rates. Equity markets will be lower and
be in a ranging markets for the next 2 years.

However, default risks in corporate bonds will increase, given poorer company
profits; hence balance sheet assessment and careful credit analysis is
necessary when purchasing corporate bonds.

The inverted yield curve of US government bonds, i.e. higher 2 year rates
compared to 10 year rates is a very powerful prediction of recession to come.
To be prepared, investors should stay in cash and avoid equity purchases.

Bonds will also be a good way to hedge inflation, but given rising bond yields,
investors should be invested in shorter maturity bonds like 3-6 month bonds.

By Chiu Wei Li
Economist (Independent)
Former GIC, Head of Quant Team
Graduate from Oxford University, in Philosophy, Politics and Economics

www.es-mgt.com.sg