Monthly Market Outlook

The Investors’ Essential Guide to 2022

January 2022 (Click here to download)

A new year has dawned, a new variant has arisen, a Downing Street holiday party has undoubtedly been had. Will 2022 bring more of the same? Or are we finally in for a peaceful path to prosperity? Covid changed the economic landscape in a way we never could have predicted in the innocent days of the 20-teens. But we’re two years into the pandemic now: will the year ahead usher in the ‘new normal’? Below are the Manager’s predictions for what investors can expect to contend with as we move through 2022.

“Transitory” has gone into retirement

Much like Covid, inflation is here to stay — a fact that Federal Reserve Chair Jerome Powell finally conceded at the Fed’s December meeting, when he officially retired 2021’s fiscal buzzword. Consumer prices stateside just keep climbing: November recorded an annual inflation rate of 6.8%, the highest reading in more than 39 years. The UK reached a decade high of 5.1% in the same month.

5.1%

November 2021 UK annual inflation – the highest rate in a decade

Source: Bank of England

Compounding this pressure on consumers is rising income taxes, higher mortgages and exorbitant gas and electricity bills courtesy of the UK government and supply-side backlogs, respectively. Things are simply costing more, which eats away at the public’s take-home pay and will have knock-on negative effects on the retail and consumer discretionary sectors.

But, before you start burning five-Pound notes to save money on fuel (if they’re being rendered worthless anyway), let us tell you of the eventual bright side: people will need to earn more. Wage inflation will be necessary in order to keep the economy moving and eat away at the national debt. Perhaps this falls under Boris Johnson’s indeterminate goal of ‘levelling up’. Is he enigmatically telling companies to pay their employees a bit more? While we wait for the answer, we advise an investment approach that accepts the current inflationary backdrop; inflation is going to stay ‘higher for longer’, and certain industries are going to be squeezed in the early days of 2022.

Interest rates will rise in the UK and US

One of the plus points of Central Banks acknowledging that inflation is not transitory after all is that they are more likely to fight it. The Bank of England kicked this off the week before Christmas with an interest rate rise to 0.25%, a move that caught markets off-guard. The rapid spread of the newly discovered Omicron variant of Covid-19 had bred consensus expectations for the status quo to be maintained at the developed world’s Central Banks. But the Fed too ended the year on a hawkish note, speeding up its tapering efforts at a pace that will see its bond-buying programme put to bed by March. While the US Central Bank reiterated that interest rates will be held at record lows until employment figures look fully supportive of hikes, the steady recovery in the labour market leads the Manager to suspect a rate rise by summer — potentially rendering inflation less problematic for savers and investors in the future.

The Fed’s dot-plot shown above is used by the US Central Bank to signal its outlook for the path of interest rates. In the December Federal Open Market Committee (FOMC) meeting, officials were anticipating three rate hikes in 2022 and three more in 2023 as inflation readings caught the committee off-guard. This led them to move quicker than the last time they tightened monetary policy in a bid to keep the US economy from overheating amidst high inflation and near-full employment. Chair Jerome Powell and other officials are set to address the outlook over the next week, ahead of their 25-26 January meeting, where they could signal the likelihood of a March move.

Republicans will reclaim the Senate and the House

If politics is a popularity contest, Joe and Kamala are losing. And their approval rating of only 42% (as at 12 December) bodes ominous for 2022’s mid-term elections, which will determine which of the two American political parties will have control of both the House of Representatives and the Senate. Currently under control of the president’s party, the Houses of Congress are the ones that truly determine which bills get passed. The unpopularity of the president means his party is likely to lose control of both houses as constituents go out and vote for something different; this is what happened in 2018, when Democrats swept the house on flagging faith in then-president Donald’s Trump’s leadership. For comparison, Trump’s approval rating in the December prior to the 2018 mid-terms was a floundering 37%.

So, what does this mean for investors and the public at large? Republicans are traditionally the party of the fiscally conservative; they will rein in spending. Those hefty stimulus checks will become a relic of the past.

We get to keep the economic recovery

No one will remember 2020 and 2021 fondly. But here’s a bright spot in all the Greek alphabetised gloom: the anticipated V-shaped economic recovery actually happened.

Source: Sanlam Private Wealth, MSCI, Bloomberg

And while the numbers might not be as eye-popping as they were at the start of last year, the Manager believes the upward trajectory will keep. Momentum is undoubtedly slowing due to a dearth of demand on supply chains and the game of catch-up they are being forced to play, but there’s a lot of pent-up demand and money chasing those goods. Furthermore, robust earnings are expected to persist into the new year. In early December, a Reuter’s poll of 45 strategists forecast gains of 7.5% to the end of 2022 for the benchmark S&P 500 Index, even after the emergence of Omicron. As for GDP, the IMF envisions global growth of 4.9% for the next calendar year, with the Organisation for Economic Co-operation and Development predicting economic expansion in all G20 countries.

Source: Bloomberg, UK Office for National Statistics

Omicron might be the Covid version of the common cold

Part of the reason recovery is persisting is the collective mental phase the public has reached with regards to Covid-19: the essence of the last six months has been acceptance. For bad or for worse, Covid exists in the world, and we are learning to power through to keep society and economies afloat.

While the landscape changes every day, December brought promising developments hot on the heels of Omicron. Scientific studies in both South Africa and the UK found that infections from Omicron tend to be, in general, less severe than those of prior variants. We’re in the midst of Covid’s biggest wave in terms of case counts and, yet, hospital admissions are only slowly rising. Perhaps this is the virus evolving for its own survival; it’s not in its best interest to kill off its host.

Omicron becoming a mild illness that circulates the population like the common cold or seasonal flu would be a good outcome for markets. Developments in the pharmaceutical sector could help make this a reality: both Pfizer and Pardes Biosciences have developed pills that look promising in the treatment of Covid-19 – a welcome development for depressed industries like tourism, hospitality and the arts.

Source: Our World in Data and European CDC for EU Countries

The current climate leads us to believe these are the big things that will impact markets in 2022. But if there’s anything we’ve learned in the tumultuous ‘20s thus far, it’s that unexpected events can leave lasting effects on our lives and our investments. As such, the Manager’s investment teams keep a constant eye on current affairs to manage their impact on your investments. The Manager hopes this serves as a useful guide as we begin the new year.

Source: Sanlam Private Wealth

Sanlam Private Wealth is a trading name of Sanlam Private Investments (UK) Ltd.

The information and opinion contained in this Monthly Commentary should not be treated as a forecast, research or advice to buy or sell any particular investment or to adopt any investment strategy. Any views expressed are based on information received from a variety of sources which we believe to be reliable but are not guaranteed as to accuracy or completeness by Sanlam. Any expressions of opinion are subject to change without notice.

Past performance does not predict future returns. Investing involves risk and the value of investments, and the income from them, may fall as well as rise and are not guaranteed. Investors may not get back the original amount invested.

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