2022: Outlook for the World Economy and Markets
Hay Hill Wealth CIO Stephen Dowds and Investment Director Charles Armitage share our outlook for global markets in 2022.
"Central banks and governments are still broadly supporting growth through accommodative fiscal/monetary policy. However, with inflation remaining elevated and more stubborn than initially envisaged, the direction of travel for central banks will be towards withdrawing stimulus through reducing asset purchases (QE) and raising short-term interest rates."
"Areas to watch out for in 2022 include (in no particular order) geopolitical tensions between Russia and NATO, US Mid-Term Elections, more hawkish central banks and geopolitical tension between the US and China."
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Global growth likely to be in the region of 4%-4.5%
Expecting global equities to produce mid-single digit returns
Equities still look a more attractively valued asset class than bonds
Central banks still providing accommodation through low interest rates and asset purchases (QE). However, we believe we have reached the turning point in ultra-loose policy and the direction of travel is towards tightening, albeit financial conditions are likely to remain accommodative in 2022. The tightening of policy has been well signposted to the market, however, a sudden acceleration in tightening is likely to cause volatility in asset prices
Inflation is likely to remain elevated, due to ongoing supply chain issues and labor shortages in certain sectors
Supply chain issues are likely to ease somewhat towards the middle of 2022 as factories in South-East Asia ramp up production following the Delta Covid wave
Robust growth and elevated inflation will put pressure on low bond yields, which is likely to cause volatility in equity markets, most notably companies that are richly valued, namely technology/growth stocks
While aggregate global growth numbers remain robust, some varied vaccination rates across the globe, especially in developing economies likely to result in a disparate growth outlook
We expect the US economy to grow at 3.25%-3.75%, driven by the continued recovery from the pandemic, as well as supportive fiscal and monetary policy. The Mid-Term elections will start to come into focus in the second half of the year
Growth in the Euro Area is likely to be in the region of 4%-4.5%. The area should benefit from the ongoing cyclical recovery in the world economy, as well as fiscal support from the EU recovery fund. Moreover, the ECB remains supportive through loose monetary policy
The UK economy should grow in the region of 4.25%-4.75%, making it the second year in a row as one of the fastest growing G7 economies. Covid related global supply chain issues have masked some of the Brexit-related trade friction with the EU and the UK government has work to do to help companies adapt
Japan should benefit from the global cyclical recovery and a central bank that can keep policy loose for longer due to lower inflationary pressure
While strong global growth should be positive for Emerging Market economies, varied vaccine rates and Covid policies are likely to result in a mixed growth outlook for the region. Moreover, tightening by the Federal Reserve is likely to put pressure on EM economies as capital flows away from the region and back to the US
We still expect good growth from China, in the region of 5%-5.5%. This is of course somewhat lower than previous years, which reflects the current challenges the economy faces, such as deleveraging in the property market
Our base case was for oil to test $100 in 2022, however, heightened geopolitical tension owing to the invasion of the Ukraine by Russia has sent the price straight through $100 and it’s likely to stay there until tensions recede and or there is some kind of resolution
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