2022 Macroeconomic Outlook

We can look at the macroeconomic outlook for 2022 either through the prism of growth and inflation or in terms of valuation, though both are interlinked. Growth and inflation are not overly problematic. Inflation should stabilize by the end of the year as supply chain disruptions abate, and the outlook on growth is likely one of moderation in advanced economies as the rush of fiscal and monetary measures ebbs. The real concern is valuations. We expect a continued rally in a selected number of assets that eventually reach a sudden end at the close of 2022. Therein lies the opportunity – first in a continued rally and then in the resulting dispersion in assets.

Core inflation is expected to fade faster than expected, but energy prices should rise

The outlook for inflation is determined by the supply chain constraints, extreme degrees of liquidity and energy prices. During the pandemic, with many services unavailable, consumers diverted towards manufactured goods. At first, sellers were able to dip into their inventories to meet rising demand before shortages began to pop up across much of the global supply chain. Some production has already rebounded but others will take months as investment is needed to increase capacity.

On the monetary side, both the ECB and Fed are behind the curve, convinced that inflation is mostly a transitory phenomenon and that their credibility is bulletproof. That can lead to a cycle of rising prices leading to wage growth far above productivity, which leads to higher inflation.

It also determines in part the strength of global demand at a time when the supply of goods can’t keep up – in other words the global economy is above the so-called output gap. Inflation in the US has reached levels not seen since the 1990s and the Fed, and to a lesser extent the ECB, are playing a dangerous game, paying little attention to the experience of the past and of many emerging markets. We expect these central banks to steadily and increasingly turn more hawkish as they become more prudent. That should drive a more rapid economic slowdown by the end of 2022.

As inflation abates more rapidly than expected in the second half of 2022, OPEC+ will have a strong incentive to curtail oil production to maximize its rent ahead of a greening economy. As OPEC+ taxes growth as much as it can, the odds are that the market will rapidly accelerate ESG investments and perceive a lower for longer path of growth.

A continued rally

In such an environment, with liquidity moving through the system, decent growth and central banks belatedly moving to control inflation, we should see a continued rally in popular styles such as Growth and Quality, but also the search for Credit and eventually Duration. The realization of lower growth for longer is likely to eventually be a hammer on the Growth and part of the Quality style, especially as companies eventually start to compete on prices to capture market share, encouraged by ever rising regulatory pressures, something we’ll see more likely at year end 2022.


What does it mean?

In an environment where liquidity steadily wins over fears of rising inflation, we are faced with continued trends in North American equities, Growth and the Quality style. But behind this are vast forces steadily shifting as ESG solutions push to the fore and winners and losers are ever more differentiated. That, to us, suggests proper analysis of trends and sectors as well as smart diversification across styles as is available in flexible solutions.
By year end 2022, equity markets should go through the eye of the needle, suggesting holding long-term US Treasuries as a partial hedge. In this phase of strong dispersion, we should see a large amounts of dislocation and, out of these, an enormous opportunity set as some fundamental forces should quickly come to the fore. This includes:

1. Climate change and the broader ESG necessity

2. The renewal of the old economy through new companies and innovations as old sectors find it difficult to adapt and some dominating companies come under strong regulatory pressure

3. High Yield and financials are likely to offer a great but very temporary opportunity to buy as the market will rapidly focus on a world where fixed income is more in demand.


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