7 minute read
2022 investment outlook
Key themes:
Global economic growth is set to moderate on withdrawal of stimulus • Interest rates to keep returning to normal on elevated global inflation • The US dollar is expected to appreciate against major currencies
Following a robust recovery in 2021, global economic growth is set to moderate in 2022 as the stimulus is pared back across major economies. Global economic growth is expected to moderate by a full percentage point to 4.4% in 2022 from 5.9% in 2021.
Advanced economies will slow down to 4.5% from 5.0%, with the US and the UK’s economic growth moderating to 4.0% and 4.7%. The Euro area’s growth will moderate to 3.9% from 5.2%.
Emerging markets are expected to have a bigger contribution in this slowdown, with a growth of 4.8% in 2022 from 6.5% in the prior year. Brazil, Russia and South Africa are expected to moderate significantly in 2022, to 2.8%, 0.3% and 1.9% from above potential growth rates of 4.7%, 4.5%, and 4.6% in 2021 respectively. China will also see growth moderate to 4.8% from 8.1%. Headwinds for the global economy, emerging markets and developing economies, and financial markets are:
the US Fed’s withdrawal of its asset purchase programme and interest rate hiking cycle
Omicron
China’s growth slowdown
However, should China stimulate its economy by further relaxing credit-lending standards, this will likely offset these headwinds to the benefit of emerging markets and the global economy.
Global supply chain pressures combined with ultraloose monetary policy and unprecedented fiscal policy continued to generate both supply- and demand-side pressures. This pushed inflation to levels not seen in many decades. Initially, major central bankers believed that the rise in inflation was transitory, and as such there was no rush to withdraw monetary policy stimulus. However, the factors that drove inflation to multi-decade highs remain.
Interest rates are expected to keep returning to normal on elevated inflation. One of the big questions for markets is the pace of interest rate normalisation, especially from the US Fed. On 3 February 2022, the US Federal Reserve kept its interest rates unchanged at 0-0.25% during its first Monetary Policy Committee meeting of the year. However, the central bank indicated that it could soon raise interest rates for the first time in more than three years as part of a broader tightening of historically easy monetary policy on the strong labour market and elevated inflation that brought turmoil in the financial markets.
The US Fed is now expected to increase the Fed Funds rate four times in 2022, by 25 basis points at the March, June, September and December meetings, followed by at least two hikes in 2023. This is in addition to ending the asset purchase programme by March 2022 followed by an actual reduction in its balance sheet.
Almost every other major central bank in these regions is expected to hike rates this year and next year, except for central banks in Japan and China.
Figure 7: Expected policy interest rates in selected Americas and Asia or Pacific countries
1-year 2-year
Sources: Bloomberg and Alexander Forbes
China, however, is going in the opposite direction. The People’s Bank of China cut one-year policy rates by 10 basis points on Monday 17 January, the first time in two years. More rate cuts are expected to follow over the year on concerns of economic slowdown. Monetary policy will therefore have to do the heavy lifting by remaining loose, with positive spillovers to commodity prices and emerging markets. The committee signalled further tightening would be appropriate in the coming months if the economy develops broadly in line with current projections. During its Monetary Policy Committee (MPC) meeting on Thursday 3 February 2022, the Bank of England (BoE) voted by a majority of 5-4 to increase its key interest rates by 25 basis points to 0.5% in line with market expectations. The members in the minority preferred to increase the bank rate by 50 basis points to 0.75%. It has been the first consecutive increase since 2004, pushing borrowing costs to the highest level in two years as inflation proves to be persistent.
In Emerging Europe and Africa (EMEA), several emerging markets have already started increasing interest rates at the beginning of 2021. This is in response to rising inflation and to normalise interest rates ahead of advanced economies’ expected interest rate hikes.
Given the imminent end of the Fed’s asset purchase programme and the normalisation of interest rates, the US dollar is expected to appreciate against major currencies in 2022. Expected short-term interest rate differentials are moving in the dollar’s favour.
Figure 8: Expected policy interest rates in selected Emerging Europe and African countries
1-year 2-year
Sources: Bloomberg and Alexander Forbes
Looking ahead
The emergence of new worrying Covid-19 variants could prolong the global recovery. The following risks remain to the global economic outlook: • New Covid-19 variants with lopsided vaccination rates
• • • High debt levels Rising global inflation Major central banks that return monetary policy to normal
• • Unsustainable commodity prices The Chinese regulation underpinning the Common
Prosperity policy framework Global financial market volatility is expected to remain in the coming months as investors priced in faster-than-expected rate hikes on the backdrop of a hawkish Fed stance. The market consensus expects US Fed to increase interest rates by 50 basis points in March 2022. This follows the annual inflation rate in the US which accelerated to 7.5% in January 2022, the highest since February of 1982 and well above-market forecasts of 7.3%.
However, the fiscal drag in the US, high inflation, and unforeseen coronavirus waves continue to have a negative impact on the global economic recovery and risk sentiment.
However, clear communication from the US central bank, easing geopolitical tensions, and waning global supply disruptions might positively support global markets over the medium term. A gradual tightening cycle will see the global financial conditions remaining loose and accommodative. This may provide supportive backdrops for emerging market yields and currencies to some extent. Furthermore, the monetary easing by the Chinese central bank may somewhat support the emerging market’s assets.
Factors that could support global financial markets in 2022
•Delayed interest rate hikes and clear communication by major central banks • • Containment of global coronavirus infections Robust vaccination drives across EM countries
•Resolution in Chinese debt crisis
• • Easing of supply bottlenecks Additional fiscal stimulus
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Table 2: Asset class performance
Global asset classes in US dollars 2021 Global Real Estate 32.6
DAX UK FTSE 100 STOXX Europe 600 ALSI S&P 500 MSCI DM MSCI ACWI Gold Shanghai Comp MSCI Asia Pacific MSCI EM Nikkei 225 JP Morgan EM bonds Nasdaq US Cash Hang Seng FTSE WGBI 22.8 17.4 15.0 19.1 28.7 22.4 19.0 -3.6 9.9 -1.2 -2.5 -4.4 -9.2 27.5 0.3 -12.3 -7.0
SA asset classes in rand terms ALSI TOP40 Index Swix Capped Swix Resources Financials Industrials ALBI (bond index) Local property Local cash
Commodities performance Gold Oil price Platinum Copper Silver Iron ore 2021 29.3 28.5 21.1 27.1 32.4 29.0 26.7 8.4 36.9 3.5
2021 -3.6 50.2 -9.6 26.8 -11.7 -36.6
Currencies Rand/Dollar Rand/Euro Rand/Pound Dollar/Euro Dollar/Pound Yen/Dollar 2021 8.5 1.0 7.4 -6.9 -1.0 11.5
Sources: Bloomberg and Alexander Forbes Investments (Data at 31 December 2021) 2020 -10.4 3.5 -8.8 9.8 2.0 18.4 16.5 16.9 25.1 24.3 20.3 18.8 24.7 3.5 48.9 1.2 0.2 10.1
2020 7.1 10.0 2.7 0.7 21.2 -19.5 12.1 8.7 -33.7 4.5
2020 25.1 -21.5 10.9 25.8 47.9 55.3
2020 5.0 14.4 8.2 8.9 3.1 -4.9 3-year 13.9 17.6 9.3 16.4 11.9 26.1 22.4 21.0 12.6 19.2 12.5 11.2 13.4 1.1 38.3 1.4 -0.1 2.7
3-year 15.8 16.7 10.8 11.0 27.3 1.5 15.7 9.1 -2.6 4.9
3-year 12.6 13.1 6.8 19.3 14.6 8.2
3-year 3.6 3.3 5.6 -0.3 2.0 1.6 5-year 8.7 12.8 6.6 11.3 8.2 18.5 15.7 15.0 9.8 7.5 10.4 10.2 10.9 2.0 28.6 1.6 4.5 2.9
5-year 11.5 12.5 7.8 7.2 23.0 2.8 9.4 9.1 -4.1 5.6
5-year 9.8 6.5 1.4 12.2 7.9 1.0
5-year 3.0 4.6 5.0 1.6 1.9 -0.3
