As we are starting the new year, it’s only customary to provide our views and global market outlook for the year to come. We have done this for various investment markets with our base case view of the economy in mind and faithful to our global macro value approach.
Nemesis global market outlook
We are entering 2022 with the scene set after the two previous years.
2020 for most people was defined by the COVID-19 pandemic. However, for investors, it was also defined by drastic policy action. 2021 was more of the same, the year of widespread expectations that vaccines would tame the virus. This looked to be the case; however, the emergence of new, more transmissible strains of the virus halted the road back to normality.
Each major region has had to go through multiple waves of COVID-19, with global case numbers exceeding 270 million and global deaths in excess of 5 million.
Since the beginning of the pandemic in 2020 central banks across the world provided a stimulus and support that dwarfed what happened during the financial crisis of 2008, injecting more liquidity than ever before. In 2008 we started with QE1 then QE2 and by the end of 2021 we reached QE on steroids simply because since 2008 the central banks, with the FED leading the group, have not been able to close the tap.
The consequence of this continuous stimulus and markets manipulation is leaking through in shape of inflation that in most central bank’s speeches since the end of 2020 and throughout 2021 was defined as transitory and of no concern. Despite those reassuring words inflation continued to rise fueled by global supply and demand imbalances, chain supply backlog, global freight coming to a halt and the recent spike in energy prices.
The year that just ended also saw witnessed some structural problems with Evergrande default process in China that was labelled as “The Chinese Lehman”, the turmoil that followed the US elections in 2020, Angela Merkel leaving the stage put an end to a long-lasting European’s economic and foreign policy, geopolitical tension building up in eastern Europe and also in Central Asia with the return of the Taliban regime in Afghanistan.
global Market Outlook
Given everything that happened what will 2022 look like?
The spread of the Omicron variant will undoubtedly be something to watch, but I don’t believe it will be the most important factor from a market perspective. I view central bank policy action as the key driver of returns for
2022 and I believe we are heading towards policy normalization.
In 2022 stock picking will be more important than ever, volatility will be a constant factor during the year, bond markets will come under pressure in having to adapt to a new tightening policy, agency mortgage-backed securities will also come under pressure from rich valuations and increased volatility, Japanese equities will continue to deliver improving returns on equity, while economic stimulus, business reopening and strong global capex suggest that Japan’s stock market could outperform in 2022, the US dollar will strengthen in the first part of the year but lose steam in the second part of the year, oil will continue sprinting ahead and exposure to specific commodities will outperform.
Going into a new year we always try to identify which risk/surprise factors could hurt the financial markets if they had to materialise.
Here what keeps us awake at night :
- Inflation becomes a much bigger problem than expected and central banks will have to increase interest rates more than announced.
- Stagflation scenario. As politics will be a very influential factor with regards to markets from French elections, to Olaf Scholz new policies and of course midterm elections in the US as the last catalyst we could see social unrest developing over the Covid situation leading to a loss of confidence in governments that combined with the new
“Covid class people”, happy to stay home and collecting payments, could create a shift towards saving money and turndown in demand. This could be the beginning of Stagflation.
- Chinese derail in 2022. A hugely over leveraged property sector fuelled by Evergrande could bring the entire financial system to collapse creating another Lehman event. Another worry related to China is that they might decide to invade Taiwan as they made no secret of thinking it should belong to China.
To summarize, we would expect equity returns in 2022 to fall short of what they delivered in 2021 with negative returns being quite possible. It’s safe to say that the easy days and easy money are now behind us, and we should prepare for plenty of volatility in the year ahead, being careful where we walk to give priority to fundamentals.
” Only when the tide goes out do you discover who’s been swimming naked”.Warren Buffett
Source: Pier Alberto Furno – Chief Executive Officer, Senior Portfolio Manager – Nemesis – 2022 Global Market Outlook