08 Apr 2022
Ongoing inflationary shocks, the questions around interest rates and the emergence of the new Omicron Covid variant are all making navigating the next twelve months more challenging for investors. Nonetheless, when we look beyond the headlines, there remain some reasons for optimism going into 2022.
It has been a tragic start to the year. Here in Britain, we have become used to thinking of war as something that happens elsewhere – not in Europe’s backyard.
Seeing the terrible events that are taking place within Ukraine and on her borders reminds us that peace should not be taken for granted. I am writing this with a sense of shock, anger and helplessness amid a growing humanitarian crisis.
I don’t know what the outcome of this geopolitical struggle will be, other than it will certainly mean human misery and economic calamity for both Russia and Ukraine.
It may seem utterly tone deaf to be discussing financial matters at such a time, but we have a duty to ensure that clients’ savings are protected from the fallout of this conflict and the economic sanctions put in place.
For now, we’re expecting the response from major central banks to be limited given existing inflationary pressures and amid expectations of even more commodity supply disruptions.
This suggests markets may experience a period of extended volatility, with news flow to remain unsupportive as sanctions against Russia bite deeper.
However, it can be difficult to make accurate forecasts when the world is simultaneously dealing with conflict in Europe and a global pandemic – each one of which, in isolation, is beyond the experience of most investors.
Even before Ukraine dominated our newsfeeds, it had been a complex start to the year. A major reassessment of the outlook for the global economy accompanied the biggest swing from ‘growth’ to ‘value’ stocks that most investors would have ever seen. We discuss this topic in more detail here.
Since the last issue of Global Outlook, the US Federal Reserve (Fed) and other developed and emerging market central banks have demonstrated more caution, as inflation has proven to be more stubborn than they had expected.
Equity values have fallen, bond yields have risen and market volatility has increased. Meanwhile, commodity prices started to strengthen and the US dollar appreciated.
The events in Ukraine will be the focus of investors in the weeks and months ahead, but there are likely to be a number of additional areas that investors will need to pay attention to:
Covid – It looks increasingly likely that the effects of Omicron will prove shorter-lived than many people had feared, but the latest major variant serves as a reminder that the world is only as good as the weakest link in the vaccination chain. This should concentrate the minds of leaders in the year ahead amid the continued re-opening of the global economy.
In the latest Global Outlook, we discuss how Covid-induced supply-chain constraints weighs on the recovery.
Inflation – Ukraine has complicated matters but central banks (and investors) had already underestimated the scale and persistence of inflation accompanying the re-opening of the global economy. Energy prices have been eye catching, but labour markets are also likely to be a focus of attention. Will the millions of people who left the workforce return and solve Covid-induced labour shortages? Or will we see higher-wage demands spread beyond sectors disrupted by Covid? Inflation has become a political, as well as an economic, problem.
Interest rates – The Fed, the Bank of England and the European Central Bank have voiced concerns about inflation. While markets expect central bank rhetoric and action over rates, it’s not hard to see scenarios where they may have to become even less market friendly. Policymakers have (so far) maintained their relatively hawkish stance, despite the risks to growth and financial stability posed by Russia’s actions in Ukraine.
China – Chinese equity and bond markets suffered further weakness and volatility at the end of last year, thanks to additional regulatory interventions by regulators, the deepening woes of the broader real estate sector and the drag from the country’s ‘zero-Covid’ strategy.
While there appears to be some signs of relief appearing in the Chinese real estate market, it’s clear that an adjustment in this sector will not happen without an adjustment of the whole economy, given the scale and importance of the industry. That said, China’s economic growth will continue to outpace the global average – albeit not by the rate that we have become accustomed to.
Elsewhere in Asia, India has unveiled a pro-growth, pro-investment budget. We look at its potential effects on the country’s stocks, bonds and currency.
Corporate profits – Company earnings exceeded expectations by some way last year. The latest set of US earnings numbers was mixed but, in aggregate, continued to be encouraging. Corporate cash flow is improving, and we expect more capital investment as a result. This is one area where we may end up being pleasantly surprised. Karolina Noculak takes a deeper look at this topic.
In addition to the articles mentioned earlier, you can also join Catie Wearmouth as she discusses the importance of gender equality in the workplace and how our multi-asset portfolios promote this critical goal.
There’s a lot to think about right now. I pray for better times before I write this introduction again. But in the meantime, I hope the articles in this issue of Global Outlook will help you navigate the uncertain waters ahead.
RISK WARNING
The value of investments, and the income from them, can go down as well as up and you may get back less than the amount invested.