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Situation on the Financial Markets

On June 23, at the first session of the 28th International Workshop held in Palma de Mallorca by MAPFRE GLOBAL RISKS, José Luis Jiménez, Chief Investment Officer at MAPFRE, conducted an interesting analysis of the current situation of the financial markets. While during his presentation he outlined the key points of a challenging context that we are clearly up against, our expert stressed that we are facing it in a time of unprecedented technological, scientific and human advancement.

 

According to the latest report on the economic outlook prepared by the World Bank, the global situation is frankly complicated. Following the major crisis caused by the COVID-19 pandemic – first with a strict lockdown and then significant restrictions on movement – Europe is suffering the consequences of Russia’s invasion of Ukraine, which is prolonging the disruption in supply chains and accentuating the economic slowdown. “We had a general standstill in activity around the world, and just as we were starting to recover, another war hits Europe and puts us back to square one,” said José Luis Jiménez, Chief Investment Officer at MAPFRE, at the start of the inaugural presentation at MAPFRE’s International Global Risks Seminar. From this starting point, a compounding factor should be noted: on this occasion we are talking about a global trend. “It’s happening in developed countries as well as in emerging countries,” he stressed.

One term used to describe this situation, coined in the economic field in the 1960s, is stagflation. It was a British conservative, a Minister of Economy, who used it in a Parliament for the first time, stating that the world faced the worst of two situations: on the one hand, high inflation and, on the other, low growth (stagnation).

An unexpected and unprecedented situation

If we go back a few years, all the forecasts pointed to interest rates being very low, and even negative, for decades, and there were no signs of inflation. “Globalization had given us a very comfortable environment, and yet what has happened has changed everything,” said Jose Luis Jimenez. By averaging all post-pandemic forecasts, very slow global economic growth and a sharp increase in prices are anticipated. “The fact that we cannot access oil, gas or any other raw material at competitive costs is generating this inflation. There are forecasts that say that by the end of this year or early next year this financial tension will ease, but as time goes on we are getting used to the idea that it may not subside as quickly as expected,” he said.

This difficult situation impacts both the financial markets and the role of insurance companies. “We’re seeing how many of the assets we have on the balance sheets are suffering one by one. What has been doing well? Raw materials. Equities in Latin America as well as investment in infrastructure. Why? Because the prices of services are usually linked in some way to inflation,” said the company’s Chief Investment Officer, who also warned that interest rates will rise considerably in the next year, which will curb business credit and will be a hard blow for families. “Central banks will work to find a balance, holding inflation back while preventing interest rates from reaching very high levels,” he added, strengthening macroeconomic frameworks and reducing vulnerabilities.

Learning from preceding crises

In 2012, the eurozone faced a major internal crisis, which ended with the intervention of the European Central Bank. As was the case then, the rise in the risk premium experienced by countries such as Spain and Italy is a warning for the markets. “We need a tuning mechanism to avoid us seeing higher costs of financing in the southern countries,” he explains.

This entire situation is causing a globalized economy to evolve into a region-based economy, a practical and effective development that, nonetheless, can be harmful in the medium and long term. This is, however, the scenario we face. “We’re going to have a lot of supply restrictions, and that’s going to continue. Is there going to be financial stress? Definitely. And low economic growth, as I said at the start, will lead us to a period of stagflation,” admitted the expert who, in light of this crisis, believes that structural tensions will not cease. MAPFRE’s Investment Management advocates for progressive intervention from central banks. “They are going to intervene, but maybe not all of them with the sufficient speed and need. We are going to hear talk of economic contraction, increased unemployment, increases in default on debt payments, possible bankruptcies and even some social unrest,” he admitted.

Without giving in to pessimism, Jimenez said that in this context it is necessary to be prudent and discount the view that growth in prices will be moderate, but not to have a short-term outlook of the financial markets. To exemplify the necessary perspective that allows this moment to be calibrated, he drew our attention to a “very similar time in history, where there were wars, pandemics, marked immigration movements and a lot of political instability”: the Renaissance, an era in which humanity went from the darkness of medieval times to the burgeoning of the arts and sciences. “The teaching now is that that term was coined 400 years later. Before, that part of the history had no name, and somehow went unnoticed. Today we find ourselves in a similar situation. We are a generation that sees technology advance in real time,” he said. The question he added is whether we will be able to put that technological, medical, scientific and human advancement into context. In the middle of this storm, with so much crisis, inflation and interest rates rising, it’s not easy to perceive that we are experiencing a new renaissance. Today, there are many more scientists in the world than there were in the last 20 centuries combined. All of that will certainly lead to a better situation,” he concluded.

 

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