Last week Schroders held their Crystal Ball 2022 Outlook webinar where Schroders Group Chief Investment Officer Johanna Kyrklund and Chief Economist Keith Wade looked ahead to 2022, delivering their expert insights for what is set to be another challenging year for global economies and markets.
Hopes of a sustained post-pandemic uplift in growth rest on the ability of markets to navigate the growing threat of inflation and any Covid-19 tailwinds.
Omicron uncertainties too great to support a buying opportunity
The audience were told that the uncertainties caused by the emergence of the new Covid-19 Omicron variant are too great to support buying opportunities.
Johanna Kyrklund, Group Chief Investment Officer and Global Head of Multi-Asset, commented:
“It’s very early days in dealing with this new variant but we’re not back at square one as we were in March 2020. In the intervening time we have learnt a huge amount about the virus, the science is moving at speed, and much of the developed world at least has high levels of vaccination coverage.
“I therefore don’t think it’s time for investors to be shying away from risk entirely. But the uncertainties are too great for this to be called a buying opportunity.
“This time last year, we had the announcements of the first Covid-19 vaccines. That was the moment when being punchy proved the right strategy: big bets on cyclical assets – especially those tied into the re-opening trade – proved the right call.
“However, markets have moved on since then. The economic cycle has matured and valuations are higher now. With the new variant posing an additional risk to growth, I don’t think it’s time for similarly broad macro calls. It’s time to be more nuanced.
“Investors also need to bear in mind that the emergence of the new variant may see central banks delay tightening monetary policy. We already thought central banks were behind the curve in terms of reacting to higher inflation. If they further delay tightening, this could continue to support valuations.
“I’ve been asking myself: at this late stage of the cycle, what would I be doing, even if this new variant hadn’t appeared? And the answer is: increasing diversification; adjusting cyclical exposure; and moving out of “re-opening” trades. This all still holds true.”
Global growth set to cool as Omicron variant increases stagflationary risks
The audience were told that the global growth is set to cool as the massive policy stimulus in response to the pandemic fades.
Keith Wade, Schroders Chief Economist, commented:
“After a surge in activity in the first half of the year the world economy hit an air pocket in the third quarter. Bottlenecks in supply chains meant that delivery times soared and firms had to cut production due to a lack of parts. As a result global growth stalled while inflation rose sharply.
“Our near term view is that the third quarter slowdown in growth is temporary and the world economy will re-accelerate in the current quarter, led by the US. An easing of supply chain problems is supporting global industry where orders remain buoyant.
“Looking further out into 2022 we see growth cooling as the massive policy stimulus in response to the pandemic fades. There will be support from consumer and corporate spending, but overall demand is set to ebb. Inflation should then moderate, but we will probably have to wait until the second half of next year to confirm that the rise has been transitory.
“The emergence of the Omicron variant occurred after we finalised our forecast, but clearly increases the risk of new restrictions on activity and renewed supply side disruption. At this stage it is too uncertain to judge the macro impact only that it adds to the stagflationary risks in the world economy.”