Catch-22 in 2022?

Last year markets took encouragement from the scientists as vaccines took the fight to Covid-19. The US led the way and notably the major technology companies, but the UK also enjoyed its best year in five years.

Christmas 2021 saw the global emergence of the Omicron variant and with it a return to some lockdown restrictions. However, the vaccine booster programme and the antibody kicker from the booster jab, provides grounds for optimism in the UK. Omicron has proven to be highly contagious, but the spike in South Africa appears to have been reached far more quickly than with Delta. Indeed, it is encouraging to see that new cases in South Africa are now less than half their peak. With cases soaring amongst the younger population the key now appears to be the effect on the older generation from mixing with family over the Christmas period and ability of the NHS to cope given staff self- isolating. The understandable surge in demand for testing kits is the latest worldwide challenge. In the UK, the four home nations have a confusing and dis-jointed approach, with England relying on mass testing and a lighter lockdown.

Could we possibly be facing a short, sharp shock from Omicron, rather than the prolonged agony of earlier variants? Globally, could it herald the beginning of the end of the pandemic with natural immunity and vaccines turning Covid-19 into a cold rather than a killer virus?

As the outlook for global economies remains bright, central bankers now face a catch-22 situation in 2022 and are walking a tightrope. Tighten monetary policy too fast and risk choking off global economic recovery or be accused of being behind the curve on inflation. Central bank policy error is a risk in 2022. Another short-term risk is irrational government responses to Omicron. We know lockdowns are disruptive for global supply chains and are inflationary. Omicron is spreading globally and many countries have low vaccination rates or less effective vaccines. China also has a draconian zero-tolerance Covid-19 policy which has not helped supply chains previously.

The UK economy is set to recover the fastest of the G7 countries and the IMF remains positive about the global outlook. Although Omicron could well slow the pace of global economic growth, but largely due to further supply chain disruption from lockdown/self-isolation measures. This could also be inflationary while energy costs such as gas prices are another major headache. Central banks have moved on from their transitory inflation message with the BoE hiking rates in December. While the US Fed has accelerated tapering and now markets expect three rate hikes in 2022. With many inflationary pressures linked to Covid-19/global supply chain issues (and also second hand car prices) can central banks tame the inflation tiger? If pent-up consumer demand is dented by higher energy prices/Omicron uncertainty, it may help but it really needs new manufacturing capacity coming on stream. Let’s hope central banks and Omicron don’t hit business confidence. In the West, de-carbonisation and the move to a greener future could also be inflationary. Skill shortages in green technologies are also being seen in other industries. Central bankers must be hoping higher inflation does not become entrenched in higher wages.

Besides Omicron, supply chain disruption and inflation, we will also need to keep an eye on geo-politics. In the past, investors have not been too concerned by Russia and the Ukraine however with wholesale gas prices already at record highs, an escalation could result in a further spike. In the UK, higher energy prices could produce an ugly inflation spike in the Spring.

Elsewhere, while much of the world focuses upon greener energies, China appears to be steering its own course ignoring global warming and focusing on its own energy crisis, as well as problems with its property development sector. Expect the authorities and the PBoC to remain supportive. Tension with Taiwan is ongoing, but in the short-term China is more focused on delivering a successful Winter Olympics and managing domestic challenges, such as Evergrande.

While we expect some short-term uncertainty and volatility, we will come through the latest Covid-19 crisis once again. Clearly some businesses and sectors will be more adversely impacted as per previous occasions and the financially sound will emerge winners, given government support measures cannot match that of the past. Avoiding the lame ducks will continue to be key in 2022.

US technology giants, aka the ‘FANGMAN’, were winners again in 2021 rising by 40% and now have a combined market value of over $12trillion. Apple has recently also become the first $3 trillion market cap company, although Zoom, a major lockdown beneficiary, saw it’s value fall by 45%.

The ‘all-in’ on risk driven by central bank QE has seen liquidity flow into all risk assets even Bitcoin. Will the shift in central bank stance and the removal of the QE comfort blanket lead to a bursting of the ‘all-in’ risk mantra in 2022? The eye watering valuation of many loss-making US technology companies that have listed in the last year or so is a cause for concern.

Interest rates are now on an upward path, albeit from a record low level. The inflation outlook and interest rate path together with the acceleration of tapering does not look good for fixed interest. But, as yet, shouldn’t be bad news for equities.

Meanwhile, major US private equity funds appear to have ample liquidity and will no doubt be hunting again in 2022. We expect the UK to be top of their shopping list given UK plc valuations continue to look very cheap against global peers. Despite Omicron uncertainty and political turmoil, the UK still looks a sensible place to remain invested relative to other geographies. Talk of the UK hitting fresh record highs during the year, doesn’t seem too unrealistic, all things considered.

Clearly, Omicron is going to create a challenging start to 2022 and the first quarter for global markets but with uncertainty and volatility comes opportunity for long-term investors.


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