Despite the continuing Covid-19 pandemic, and new variants being discovered in 2021, the virus didn’t deliver the same shock to the markets that we saw in early 2020. In fact, 2021 was a strong year for most investments, particularly the stock markets. However, it did come with its own challenges, such as inflation which saw the prices of many goods and services, including necessities such as energy and petrol increasing rapidly.
Given the surprises we’ve seen over the past two years, it might feel slightly pointless to try and provide an outlook for 2022, but as long-term investors, we always stay vigilant to shifts in the investment landscape that could have an impact on achieving our goals. The changes we look for reflect genuine signals that will underpin market movements, rather than noise which can drive short-term volatility.
Covid-19 remains key for the outlook.
It’s likely that we’ll see economic growth slow compared to a very strong 2021, but still continue for a second year. Importantly, last year’s encouraging growth wasn’t equal for all economies. Much of this unevenness was the result of national shutdowns, which saw Europe slow while Asia and the US’s economies recovered, and vice versa, at various points in the year. Now, with a world more than two years into the pandemic, we would expect that there will be greater coordination going forward, as a result of both herd immunity and continued vaccine rollouts. This is supported further by New Zealand and Australia relaxing their ‘Zero Covid’ policies, which just leaves China being the last major nation still pursuing that policy.
The scale of growth we’re likely to see will be dependent on governments’ abilities to safely lift covid restrictions. We saw the discovery of the Omicron variant, late in 2021, cause concern in the markets due to the uncertainty it created as to its potential impact on a sustained global economic recovery. However, as evidence now points to Omicron being more virial but far less severe than previous mutations, markets took comfort and have recovered much of their lost ground.
How Covid evolves in 2022 is likely to dictate how Central Banks and government policymakers will react. They’re already working to correct the imbalances between supply chain drive and consumer demand, and we expect to see inflation ease as these bottlenecks reduce. We are also likely to see some policy change in 2022, as government spending has provided much support to households and businesses over the last two years with furlough schemes and business loans. Governments are likely to start scaling back these efforts as the economy edges towards pre-pandemic levels.
The impact of inflation
Inflation reached a 10-year high in 2021, which caused Central Banks to increasingly show that they are paying attention, but equally acknowledging that there is little they can do to solve the current pandemic or supply chain issues.
Inflation has increased as we’re currently experiencing one of the largest non-conflict-driven demand shocks for particular goods and services, combined with a hit to global supply chains that are used to working with ‘just in time’ methods that aren’t built for disruption. To add to this further, there have been geopolitical tensions that have driven prices higher – which is particularly evident in the energy sector.
Over the last two years, demand for goods has spiked, especially when services such as cinemas, restaurants, and holidays have been taken off the table. When the ability for consumers to consistently spend on services returns once more, the supply chain for goods will remain important, but less so.
Central Banks and interest rates
Inflation is notably higher than it has been for the last 30-40 years in most economies, but rather than coming from a wage-demand led cycle, in this recovery the inflationary pressures are coming from supply chain issues. For example, last year we saw supply chain issues hit computer chips, halting production of almost everything with a computer or screen from new cars to laptops. Although Central Banks only have limited power, they are working to provide reassurance to the markets that they will act if necessary to prevent these short-term imbalances from becoming the norm.
At the moment, it appears as though the market outlook is expecting more aggressive interest rate hikes over the next few years. However, this seems unwarranted, especially as logistics companies have a significant incentive to resolve the current backlog. As inflationary pressures ease from their current highs, Central Banks will need to provide long-term reassurance that inflation will not get out of hand. In order to do just this, we saw the Bank of England deliver a surprise hike in interest rates in December, from 0.10% to 0.25%. The markets anticipate this to be followed by roughly four more hikes in 2022. The US Federal Reserve hasn’t yet increased its rates but is expected to deliver three interest rate hikes in 2022. However, there is the potential that inflation will ease in the months ahead as supply chain issues dissipate. If this happens, then these interest rate increases are likely to be high, but even at this pace, it is not causing concern for the stock markets. Central Banks’ main focus will be providing support to sustainable economic growth, as there is a risk of hiking interest rates too quickly and potentially causing a recession when trying to stem off rising inflation.
Politics
This April, we will have France’s presidential and legislative elections, and while the polls currently point towards the re-election of President Marcon, he is expected to face a tough challenge from a more socially conservative opponent, either Valérie Pécresse or Marine Le Pen.
October will see the current Brazilian President Bolsonaro, who has struggled to get his reforms through a divided congress and been criticised for his response to the pandemic, face a challenge from former President Lula de Silva who could be expected to follow a less market-friendly mandate.
In November, we’ll see the US mid-terms, and if they result in the Republicans taking back either (or potentially both) the House and Senate in Congress, then it could see a return to the policy paralysis where little to no agreement can be found. While this is currently what many experts forecast, it’s worth pointing out that we’re still a long way off having a clear picture of this situation, being ten months out.
As always, our Investment Team will be keeping their finger on the pulse by actively monitoring financial markets and their impact on our customers’ investments. If we feel that any changes are required, or there’s an opportunity to take advantage of, we’ll act quickly in our customers best interests. This is just one of the things we do to make investing as simple as we can for everyone
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.
References
https://time.com/6104303/china-zero-covid/
https://smarkets.com/event/41620572/politics/europe/france/french-presidential-election-2022
https://edition.cnn.com/2021/12/12/politics/midterm-election-2022-republican-wave/index.html
https://www.270towin.com/2022-senate-election/
