6 Things to Look Out For in 2022
Inflation and Potential Interest Rate Rise
As inflation returns across the nations and central bank policy on rate rises remain uncertain, investment volatility will stay high: for example, in the UK, inflation was high in 2021 with investors expecting a rate rise in November and this raised investment volatility, although rates did not, in fact, actually rise. Yet the following month, no investors expected a rate rise while the Bank of England did go ahead and rise interest rates, which shocked markets and also increased volatility. Similar circumstances are expected to unfold in 2022. The question facing investors is the degree to which inflationary pressures are more persistent than many commentators are currently forecasting (FT December '21).
Central Bank Policies
With economic uncertainty remaining extremely high and the main solution being a central bank policy, the error probability of a policy being ineffective, or even damaging, is also extremely high. For example, although inflation remains rampant, if this is truly down to supply issues, raising interest rates will slow economic growth. However, if inflation is solely due to Quantitative Easing, a raise in interest rates will be effective but will also increase debt repayments by countries all around the world. The negative repercussions of central bank policy implementation is expected to increase investment volatility in 2022 (FT December '21).
Slow-Down in Economic Growth
Institutions expect GDP growth to be positive in 2022 and to grow by 4.6%. However, as it is the biggest regional contributor, the main concern is China, – with it accounting for approximately 30% of global economic growth in 2021.The policies implemented by Chinese Communist Policy – such as the tech crackdown in 2021 - drove huge volatility across the Asian markets. With policies being implemented without much notice, it has increased the potential uncertainty of global economic growth for 2022 (Fastmarkets November '21).
Investors continue to expect equities to outperform government bonds due to equities being supported by economic growth, strong profit forecasts and central banks only slowly removing their support to economies. The US has a higher weight to technology stocks whereas the rest of the world is overweight in value stocks. Therefore, if interest rates rise as expected, the market drivers in 2021, US growth stocks, should underperform the rest of the world. Although this didn’t play out as expected in 2021, it could succeed in 2022 if a more cyclical recovery takes place (Forbes December '21).
New COVID Strains
As we saw at the late end of Q4 2021, the Omicron variant surprised investors and caused a sharp sell-off in global equities. Investors have expressed their concerns at being uncertain about economic growth due to government intervention in the face of new Covid strains, which include lockdowns, limiting consumer spending and lowering economic growth. Over 2022, any new Covid strains are expected to also cause uncertainty in the financial markets and may cause a short-term drop in equity markets. (FT December '21).
There are a number of developing situations around the world that could potentially destabilise or undermine investor sentiment. As usual a number of the persistent offenders (Russia, China) could cause a surprise meanwhile unorthodox economic policies leave Turkey very vulnerable and other Emerging markets such as Brazil could underdeliver on expectations. The US is not immune either, with storm clouds gathering over the Democrats and mid-term elections approaching (FT December '21).
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