Following the global financial crisis, most central banks converged towards zero level of interest rates, and this has involved various forms of quantitative easing (QE) which effectively dampened down yields across the curve.
Now though, we are moving in the opposite direction, and responses to the various concerns about inflation and the economy are coming through in different ways. Since the Covid crisis we have seen a lot more fiscal stimulus in addition to monetary intervention, and the contrast in policy between the US and European economies has become quite marked.
Europe has taken a more ‘socialist’ approach to supporting struggling sectors than the US; in particular, with the Ukraine conflict contributing to an energy and food crisis as the world recovers from the pandemic, European governments are providing subsidies to those sectors and individuals struggling with higher energy and food costs.
While higher prices are likely to have a negative impact on growth in Europe, the US finds itself in quite a different position. It is significantly more self-sufficient in energy and food than Europe so there are likely to be a number of US beneficiaries of higher prices.
As a result, it is our belief that the US economy is in stronger shape: US consumers were already in a good position because of the wealth effect that has been filtering through from a reduction in debt and increasing saving levels, while the US corporate sector is also in a stronger position than its European counterparts. From a credit perspective, we therefore see more positive signs in the US over Europe, where we believe companies will remain more challenged in terms of the overall cost of doing business over the next couple of years.
Paul Brain, head of fixed income, Newton Investment Management
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