The market’s big questions for 2022

The numbers are almost incomprehensible. Since the pandemic began, central banks have pumped $32 billion into markets around the world, the equivalent of buying $800 million in financial assets every hour for the past 20 months, according to Bank of America. America. The global stock market capitalization has grown to $60 billion.

But inflation has picked up, and desiring to rein in prices, the US Federal Reserve last week announced Property purchases will close in March, with three possible rate hikes next year.

In that context, here are the big questions banks and investors are asking for 2022.

Inflation: if not transient, then what?

Central banks have been doing the opposite of inflation in 2021, shifting from reassurance that it will be a “transient” reflection of the post-lockdown recovery to acceptance that it is more persistent. In November, US consumer prices rose by fastest since 1982, Euro zone prices rose to a record 4.9% and UK figures rose to a 10-year high.

However, many banks and investors expect a pullback.

Morgan Stanley predicts that while prices will likely stay high next year, their rate of increase will peak in early 2022 as oil prices fall and supply chain problems ease.

Columbia Threadneedle also cites “supply chain improvements” as a key reason it thinks inflation will eventually “decline” in 2022. This raises the alarming prospect that Fed starts raising interest rates as well as lower inflation.

But BlackRock, the world’s largest asset manager, predicts higher inflation to continue “for years to come.”

Goldman Sachs expects core US consumer prices to remain deep above 4% next year. A central bank’s willingness to tolerate higher inflation will keep inflation-adjusted bond yields relatively low, which should also support equity markets, it said.

It expects positive returns from global stock markets and negative returns on government bonds for the second year in a row, the first time this combination has occurred in half a century.

Central banks have begun to turn off the faucet, or at least signal that they will do so next year. Investors worry that they will eventually be clamped too hard.

David Folkerts-Landau, chief economist at Deutsche Bank, said that if inflation is not contained, central banks will shift to a “more aggressive stance of monetary tightening, triggering a strong negative reaction across the board.” financial markets and most likely a severe recession.”

UBS said central bank policy error was one of the “key risks for investors and the global economy in 2022”. Bank of America added that markets are “moving from a period where central banks have tried to predict and contain volatility to a stage where they will increasingly become a source of surprise.”

Will US stocks continue to rise?

“Customers tell us market momentum has peaked, earnings have peaked, liquidity has peaked,” said Mislav Matejka, head of global and European equity strategy at JPMorgan. the central banks will tighten, you should take profits a bit.” “We don’t agree with that.”

Goldman Sachs expects the S&P 500 index to increase by 9% by the end of 2022.

However, some worry that returns from stocks, especially in the more obscure corners of the market, are not sustainable.

Morgan Stanley says its base situation is for the S&P to drop 5%. Meanwhile, Bank of America predicts that an economic slowdown and higher interest rates will drag the main US equity measure down 3%.

What is the outlook for Europe?

Frederik Ducrozet, senior strategist at Pictet Wealth Management, said the European Central Bank faces a “tough and volatile” environment for prices in the coming year.

“The broad outlook is not just permanently high inflation, but permanently high inflation volatility,” he said.

The ECB last week pledged to scale back its pandemic bond-buying program in response to higher prices, while reiterating that rate hikes would have to wait until 2023.

The consensus expectation is for the Stoxx 600 to rise 6% as the economy continues to grow and bond yields remain low, according to data compiled by Bloomberg. However, Bank of America expects those trends to reverse in 2022, with the Stoxx index down 10%.

Ben Ritchie, head of European equities at Abrdn, an Edinburgh-based asset manager, says investors should focus on businesses with strong competitive positions, determining power prices and access to structural growth drivers.

While valuation multiples for European shares are a challenge, Ritchie said the healthcare, consumer goods and financial sectors offer “a lot of opportunity.”

However, Pimco predicts that European stock markets will face “more of a challenge” due to a combination of an unfavorable industry composition, mixed energy prices and growing uncertainty surrounding the Covid— 19.

Jordan Rochester, foreign exchange strategist at Nomura, said upward pressure on energy, food and services prices will mean inflation rates in Europe will remain uncomfortably high next year.

He noted that gas prices in Europe have increased by about 573% this year, reflecting concerns that Germany could run out of supply in the winter. Rising gasoline prices are driving up fertilizer prices, which are highly correlated with food prices. Consumers are likely to respond to these developments by demanding higher wages, says Rochester.

Pay attention to the French presidential elections in April.

What’s next for China and emerging markets?

“Emerging markets had a really bad year and there will be more ugly headlines. . . partly because [China’s] Chris Jeffery, director of multi-asset assets and head of rates and inflation at LGIM.

China’s CSI 300 stock index has fallen 3% this year after policymakers in Beijing imposed new restrictions on technology, education and real estate companies.

Meanwhile, Claudia Calich, head of emerging market debt at M&G Investments, said the problems in China’s property sector were a reminder of the dangers and fragility that can be. potential in the Asian corporate bond market, until recently an area of ​​increasing interest to international investors.

Calich added that investors should brace for “significant downside risks” in emerging markets if the severity of the virus turns out to be worse than anticipated, especially as many countries still remain vulnerable. Most of the population is unvaccinated. The market’s big questions for 2022

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