The economic landscape
“As we look ahead to 2022, the likelihood of sustained volatility remains high as hopes of economic stability are challenged by the emergence of the Omicron variant. Undoubtedly new restrictions will slow down economic activity and if some of the worst expectations for the new variant come to fruition we are likely to see more severe restrictions for a longer period of time, creating a sizeable challenge for growth. Economic turbulence is likely in the first half of the year ahead.”
Macro-economic instability
“I expect the biggest question mark in the first half of 2022 will be on rising inflation expectations and how quickly interest rates will rise. We’ve seen a significant increase in inflation, outside of what we’ve been used to over the last decade, and there is a real risk that inflation expectations could become entrenched and permanent. At some point in the new year we’ll see central banks and authorities responding to this by further reducing quantitive easing and excessive monetary policy and ultimately raising interest rates, or in the case of the UK – raising them further. One of the things that I’ll be looking at closely next year is wage growth as a factor in helping to decipher if inflation is temporary or here for the long-term. If wages don’t mirror the rise in inflation, people will ultimately have less money as disposable income or to save, resulting in demand starting to fall, bringing prices down with it.”
Focus on ESG
“Over the last few years, we’ve seen attitudes to investment risk beginning to evolve with a new emphasis on incorporating ESG factors. This year we saw this amplified by COP26 and this is already having an effect on asset markets. We expect responsible investing to be a big theme next year with even more of a drive towards this, with regulation meaning that firms and investors must respond and keep sustainable saving at the fore. With next year marking a decade since the introduction of auto-enrolment and more people than ever saving into a workplace pension, we’ll see a shift and a heightened focus on how pension saving can contribute towards the greater good.”
China opportunity?
“Next year, China could be the land of opportunity. China has had a challenging year with a crackdown on companies in the information technology sector and issues with debt in the property sector. That said, we are looking as to whether there is starting to become an opportunity caused by equity prices reacting too strongly to some of economic and policy difficulties that China has experienced over the last year. The Chinese government may look to stabilise the economy and counteract any growth pressure. The current fall in valuations may well present opportunities over the next 12 months.”
Fixed income – a delicate policy balance
“In terms of fixed income, a delicate policy balance is needed but the extent and timing of policy tightening will be a key focus for 2022. Central banks face a tightrope ahead as they face pressure to keep prices from spiraling while not undermining the broader recovery, particularly now with the emergence of the new variant adding significant complication. Moving into the new year, global government bond yields remain very low and may not reflect risks as inflationary pressures appear stronger than pre-pandemic.”
Equities – pockets of opportunity
“I expect to see pockets of opportunity in equities in 2022 but the strong rally for equities over the past 18 months means that long-term value opportunities are scarce and more expensive. With the emergence of the Omicron variant, we will most likely see a period of higher volatility and lower returns. However, over the medium term, stocks still appear attractive relative to bonds at a time when credit conditions and labour markets appear broadly supportive for economies. So while opportunities may not be as strong or as attractive, both the UK and Japan offer relatively less demanding valuations and are well positioned to participate in economic recovery.”
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