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World Bank tips growth to halve: Is a market crash coming?

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Central banks continue to underestimate inflation which could impact your portfolio.

Central banks continue to get inflation forecasts wrong, with investors not taking a cautious enough approach when it comes to these predictions, an industry expert warns.

Just this week the World Bank has come out with new global predictions saying global growth will halve in 2022 when compared with 2021.

In its latest Global Economic Prospects report, the World Bank said growth will slow to 2.9% this year, down from 5.7% last year and well below its previous estimates of 4.1%.

Highlighting inflation spikes, rising rates and commodity supply shortages due to Russia's invasion of Ukraine, the World Bank is also reigning in growth forecasts for 2023 and 2024.

Here in Australia, the Reserve Bank of Australia (RBA) followed this mantra, shocking the markets and lifted rates by 0.5%.

But while central banks continue to revise targets and fight inflation through rate rises, Saxo Bank's Australian market strategist Jessica Amir is warning investors are not cautious enough through this current economic cycle.

And she is saying markets will face a "big shock".

"The warning signs have been here for several months, lending is already slowing as Aussies face the squeeze from 30-year high inflation which will get worse," she said.

"As such we think we could be seeing a 30% pull back in Australia and the US as well. The technical indicators are also warning of a sharp pull back too."

Bearish on the banks

Rising rates is usually a sign it's time to buy the banks.

This is because the gap or net interest margin between what the bank can get credit for and what it can charges its customer increases.

Basically, each individual loan a bank holds becomes more profitable.

But, in the current environment, Amir does not believe banks will outperform.

In fact she says they could be vulnerable in today's current economic climate.

"To put it into context.. who can afford an extra $800 per month if rates rise up from 0.8% to 3%,'' she said.

"This is why we are very bearish on banks and are expecting a very sharp pull back in markets as foreclosures rise, bad debts rise, delinquency rates skyrocket, hurting the economy, and banks."

Remain defensive

According to the industry expert investors are starting to shift towards defensive assets, but they may not be defensive enough just yet.

As such Amir said you should follow the CPI trend and remain in commodities, even as they reach record highs.

"Of course the largest contributor to CPI oil, is at 3-month highs, but will get higher supported by expectations China's oil demand will rise, and travel picking up the US and Europe for Summer, with motor and air travel to pick up."

"This is while supply constraints concerns linger on."

"So we think clients should stay overweight to the energy sector which will likely continue to rise to new highs," she concludes.

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