Economic Expectations
C2S talks to Janet Mui, Investment Director at Brewin Dolphin, about her expectations for 2022
Reopening economies, progress in vaccination rates, extremely supportive policy and strong growth in profits provided a boost to company shares in 2021. Can we expect the party to continue? While growth in major economies is still expected to be above average, momentum is going to slow inevitably. For most companies, consumers and investors, the worries around the rise of inflation has remained higher than policymakers expected. There are winners and losers from higher inflation but it brings with it some concerns. Future profits, for example, might not match those of the past if companies’ costs go up but they can’t pass on those costs to customers.
Inflation is the biggest near-term risk and there is a high degree of uncertainty on its persistency. From a supply perspective it seems like anything that can go wrong has gone wrong. A shortage of HGV drivers, surge in energy prices, supply bottlenecks and, at the same time, robust demand for goods have acted to drive inflation higher.
Going into 2022 it seems likely that monetary policy will be tightening to some extent. The Bank of England seems to have decided to be proactive on this topic. Its comments conditioned the market to expect an imminent rate rise, as well as two interest rate increases in the first half of 2022 alone. Although this will leave interest rates far below the current level of inflation, this policy stance is quite aggressive by comparison with other central banks. Some way behind is America’s Federal Reserve. It will slowly reduce its asset purchases (quantitative easing) and may increase interest rates by the end of 2022. Seemingly in no hurry to meaningfully tighten monetary policy is the European Central Bank. Perhaps it’s scarred by two misplaced rate hikes during the recovery from the last global crisis, which needed to be quickly reversed and more.
While the recovery has further legs in the coming year, a number of headwinds are becoming more apparent to investors. These include slowing growth, tighter fiscal and monetary policy, elevated inflation and higher market valuations. We remain cautiously optimistic on the global macro outlook. However, we acknowledge that after a remarkable year for stocks that saw vaccinations and profit recoveries vanquishing anxiety from investors’ minds, there is a new realisation that the path from here may not be so easy. However, the reason central banks have been so reluctant to tighten policy is because unemployment is still too high. The process of bringing it down means getting people into work, allowing them to spend, and driving growth and profits. Anxiety over inflation has to be seen in that context, and in the context of the diminutive returns which can be made keeping money on deposit.
https://www.brewin.co.uk/individuals/our-offices/cheltenham
Janet Mui
