Inflationary pressures have roiled equity markets and central banks alike, with interest rate hikes in several economies. State Street Global Advisors in an insights note titled ‘Tightening “Tsunami” Increases Recession Risk’ says central banks trying to get ahead of the inflation curve may be pushing the world towards a recession.

While the asset manager says there is a substantial risk, central banks have the tools to stimulate growth. “We still remain constructive on select risk assets, favouring higher-quality companies that can drive bottom-line growth. We see increasing opportunities in fixed income, given higher yields and the potential for capital appreciation,” writes Lori Heinel, Chief Investment Officer at State Street.

State Street argues that the most concerning aspect is the pressure on corporate earnings, apart from the macroeconomic effects of higher prices. Investors now have limited options for portfolio diversification in a slower growth environment. The asset management firm in its report says there is still more pain for investors in the immediate future, while also suggesting that markets may have overcorrected for an earnings decline. “The disconnect between earnings per share (EPS) estimates and market performance is as large as we have seen over the last 10 years,” writes State Street.

During this time of economic turbulence and slow growth, investors should build hedges and are advised to hold onto their real assets by the asset management firm. It is also overweight on cash and commodities as a hedge against inflation. State Street goes on to suggest some favourable investment opportunities in its report, while also explaining its rationale through research.

View the full report here.