February 24, 2022
Mark Minchin

Is the Investment Climate as gloomy as it seems?

The years 2020 and 2021 were not “normal years”. Both years humbled forecasters, virtually none of whom accurately predicted either the downturn or the recovery. Now, two years on, with the pandemic still raging, forecasters seem more reluctant to make bold predictions for 2022. So, what do we have in store for us?

For central banks seeking to withdraw emergency stimulus, there are questions about where to strike a balance between heading off resurgent inflation and keeping the recovery alive.

As always, investors are likely to be best served by adhering to the basic principles of diversification and discipline – staying focused on their long-term goals, and resisting the urge to respond to the latest news. However, this doesn’t mean that one shouldn’t seek to stay informed, regularly review the risks and outlook and maintain flexibility where needed.

Economic Growth

For all the media doom and gloom, World economic output continues to grow. The International Monetary Fund (IMF) forecast that global growth will moderate from 5.9% in 2021 to a still strong 4.4% in 2022. 

They expect adverse health outcomes due to Covid dissipating to low levels in most countries by the end of the year, assuming vaccination rates improve and worldwide therapies become more effective.

On inflation, the IMF believes that inflation is likely to persist for longer, with ongoing supply chain disruptions and high energy prices continuing throughout the year. Nevertheless, they feel inflation will gradually decrease as supply-demand imbalances wane through the year and monetary policy is tightened.

In terms of risks, the IMF notes the following, in order of importance:

  1. The potential emergence of new COVD-19 variants
  2. The possibility of higher-than-expected inflation; brought about by more supply chain disruptions, energy price volatility, and localised wage pressures.  
  3. Geopolitical tensions
  4. The ongoing climate emergency exacerbating the likelihood of natural disasters

The Wildcard for 2022 may be Inflation

In economic circles, there are many who believe the most impactful issue for 2022 will be the inflationary outcome. There are different schools of thought here, with some experts expecting the current “flash” to be short-lived and transitory, and others expecting inflation to gain momentum and be more persistent. Which way it goes may have significant implications. As always, bond markets are finely balanced – pricing in both arguments, with a bet each way.

Notably, headline CPI in the US soared by 6.8% year-on-year in November, its largest annual gain since 1982. This is important because inflation and interest rates may just be America’s largest exports.

Nevertheless, in Australia, CPI ran at a more benign rate of 3.5% for the calendar year 2021.

Around the World policymakers have already begun the adjustment process. In December, the Bank of England became the first major central bank to raise rates since the pandemic began, voting 8-1 to lift the bank rate from 0.1% to 0.25%. In the US, the Federal Reserve, which has already begun reducing its purchases of government bonds, has flagged three quarter percentage point increases in its benchmark overnight rate in 2022, with the first move expected by March.

Softly softly

Despite the jaw dropping inflation numbers, Policymakers are taking a cautious approach to raising rates, many still believing that much of the sting in the numbers will disappear as supply chain disruptions dissipate. It follows that for 2022 central banks are likely to move gently at the controls, mindful of not stalling economic growth.

There is good news out there!

The nature of the media we consume today means much of the content is focused on the prevailing risks, rather than the opportunities. Doom and gloom is ever present, but the opportunities have a habit of sneaking up on us from outside our field of view.

From the media’s perspective, “shock and awe” tends to sell better than steady, balanced, long term perspectives. 

So, it is worth remembering that the risks are not tilted in just one direction. Here are a few positive things that we believe investors should factor in, to balance up the risks:

  1. By March, as many as 1 billion vaccine doses are scheduled to arrive in Africa.
  2. We are amidst an era of accelerating transition in the world’s energy sources, with the largest increase in global electricity generation from renewables expected in the coming year.
  3. We’re in a golden age of biotech wonders like mRNA vaccines. Within a decade, we could fully map out the genetic origins of complex diseases such as multiple sclerosis and schizophrenia and scientists have opened the library of the human genome, and we’re really starting to find our way around.
  4. There is reason for hope in democratic India, which as it celebrates the 75th anniversary of its independence this year, is on track to take over from China as the world’s most populous nation. After years of witnessing the retreat of Western style liberalism and hearing that the future belongs to a rising, authoritarian China, this will be a much-needed lift for the democracies to see one of their own rising in importance.
  5. The World is beginning to make genuine progress in slowing the loss of biodiversity, with advances in modern agriculture improving the productivity of land use and reducing deforestation.
  6. Companies are increasingly embracing net-zero or totally zero by 2035 or 2050, and big petrochemical companies like British Petroleum (BP) are investing in wind, hydrogen, and solar.
  7. The most recent IMF numbers suggest the world’s richest economies shrunk by 4.5% in 2020 but grew by 5.2% in 2021. Barring an omicron-induced collapse, they are projected to grow another 4.4% in 2022. Those two years of strong economic performance will not only make up for the 2020 crash but also put advanced economies back about where pre-pandemic forecasts had them.

Geopolitical Risk and Your Portfolio

Current events in Ukraine are having direct impacts on global markets. Russia and Ukraine are suppliers of raw materials, food an energy – essential for many supply chains.

March 01, 2022