Inflation, monetary policy and mid-cycle risks: The macro trends to watch in 2022

Asset managers and researchers suggest the post-pandemic world is not yet here and 2022 will just be the next phase in the recovery cycle

Jamie Gordon

a blue globe on a paper

Far from the calm after the storm, outlooks from asset managers paint 2022 as being defined by many of the same themes as this year but in a mid-cycle phase – like 2021 but less giddy.

On the more optimistic end of the spectrum, JP Morgan predicted cyclical sectors will benefit from a return to global mobility and continued release of consumer and corporate demand for travel, services, inventory and buybacks.

Despite this, the US giant did identify potential headwinds from inflationary uncertainty, the normalisation of monetary policy, the supply of energy and geopolitics. The BlackRock iShares 2022 outlook and ETF investment guide shared the concerns around inflation but paid more mind to new COVID-19 variants and the peculiarity of the rapid market restart.

We think the most appropriate investor playbook for today prepares for a mid-cycle environment in which both volatility and dispersion increase, though this parallel may be imperfect given these unprecedented, confusing conditions.”

COVID-19 continues 

JP Morgan’s limited concern for future COVID-19 variants is rooted in a belief that populations around the world will benefit from higher immunity, lower mortality and new treatments.

Our view is that 2022 will be the year of a full global recovery and an end of the global pandemic, thanks to achieving broad population immunity and with the help of human ingenuity, such as new therapeutics,” the firm’s cross-asset outlook stated. 

Favouring a more balanced view of reopening highs and lockdown lows, Bob Jenkins, head of research at Refinitiv Lipper, said economic growth will likely continue but at a slower pace, with economies able to weather COVID-19 ‘curveballs’ even as they create short-term volatility.

“I believe we have the tools in place coupled with COVID-19 fatigue to hopefully navigate to an endemic state but other variants will likely emerge and it will cause volatility and almost algorithmically, predictable jostling of market leadership.” 

Inflation and its many facets

Arguably a more concerning and contentious issue is inflation, as debates rage on about its contributing forces and resulting discussions about rates. 

Unequivocal in his view inflation is here to stay, Jenkins argued: “Inflation is not transitory and the pandemic impacts on global economies will continue – both in terms of actual shut downs in some countries as well as the exhaust effects we’re seeing in the production of goods, supply chain issues, labour shortages and rising energy prices.” 

He added while a foundation for higher prices may be permanent and driven by supply chain bottlenecks and a reduction in the labour pool, he did predict US inflation to ease from its current, lofty heights to a range of 3.5-4.5% as these forces ease over the next year.

Agreeing, Morgan Stanley’s note, 2022 Macro Outlook: Growth Despite Inflation, said the firm’s economics team expect inflation in major markets to “peak then retreat” by more than two percentage points through next year, with supply chain disruption currently near its peak and monetary policy to tighten less than investors fear. 

Despite this, inflation is the main concern for the new year, with 44% of respondents to JP Morgan’s investor survey citing it as the biggest market risk while 52% expect two rates hikes by the Federal Reserve in 2022.

Furthermore, in Deutsche Bank Research’s Top ten themes for 2022, the firm’s global managing director and head of global fundamental credit strategy, Jim Reid, said the “huge” stimulus that remains in the system, along with easy policy conditions, mean both inflation and growth will remain high, resulting in a “growthflationary” environment.

“In turn, the Fed will likely become more aggressive in 2022 in order to curb inflation,” Reid warned. “This will tighten financial conditions for a period while investors become used to the new regime.”

Overall, he foresaw financial conditions stabilising at still accommodative levels but cautioned economic overheating and a faster pace of tightening could bring an end to the current cycle and the possibility of a recession in 2023 or 2024 increasingly into focus.

Climate finance comes into focus

In the spirit of 2021 themes continuing into the new year, the industry agreed climate finance will remain a hot topic.

“The massive investment to finance a low-carbon transition presents unique opportunities, which is supported in record-setting ETF flows,” BlackRock’s iShares division stated in its outlook.

Arne Staal, CEO of FTSE Russell, said asset managers will “double down” on aligning core portfolios with climate goals, with passive strategies central to this shift of trillions of dollars. 

Crucially, Staal argued the quality and quantity of climate data on corporates will improve as more countries introduce mandatory reporting, asset owners grow their stewardship teams and US investors begin to shift their focus towards climate change.

Importantly, he said investors will narrow their current broad environmental, social and governance (ESG) priorities to portfolios aligned to the 1.5°C target.

Supporting this, Refinitiv’s Jenkins continued: “ESG funds will begin to splinter into more thematic offerings as investors eschew the combined ‘ESG’ mandates in favour of more targeted offerings that enable them to better assess stocks aligned with the funds objectives and avoiding ‘green’ and ‘rainbow’ – referring to the UN SDGs – washed securities."

Opportunities in 2022

Taking these themes and others into account, the consensus among asset managers and researchers suggests a more favourable backdrop for equities and difficulties for fixed income.

PIMCO’s 2022 consensus outlook posited: “We expect to see substantial differentiation across regions and sectors, which warrants a more selective and dynamic approach.”

As part of this, the firm remains overweight US equities with a bias to cyclical sectors. Agreeing with this, JP Morgan expected outperformance in cyclicals and value in a tighter monetary policy environment, with a preference for reflation-sensitive sectors such as energy and financials, consumer services, healthcare and small-caps.

Seconding this, BlackRock suggested allocations to value and quality assets, along with inflation-protected fixed income positioning and ‘real assets’, including real estate, commodities and infrastructure.

PIMCO continued, expressing its favour for technology hardware as essential for global growth in 2022 as well as the secular shift to digitalisation.

Agreeing, BlackRock said: “Semiconductors are the backbone of powerful emerging technologies including artificial intelligence and digital payments.

“The current global shortage of microchips driven by increased demand for technology and hardware has impacted everything from cars to washing machines, underscoring the growing importance of the industry in an increasingly tech-enabled world.

Finally, both PIMCO and JP Morgan predict opportunity in emerging markets. PIMCO remains overweight emerging Asia, meanwhile, JP Morgan said China’s focus on deleveraging, de-carbonisation and reduction in income inequality will position it well for the long-term.

It added next year, better sentiment, stronger earnings growth and convergence of historical relative valuation should create outperformance in single countries including China, Indonesia, Russia and Brazil.

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