Vijay Kumar Gaba

 Manulife Investment Management – Disruptive tightening and China key risks

Monetary policy—Global central banks are sounding more hawkish—U-turns from the Bank of England (BoE), policy adjustments from the European Central Bank (ECB), a Bank of Canada (BoC) that’s actively tapering, and a U.S. Federal Reserve (Fed) that’s set on winding down its asset purchase program. While our base-case expectation is that the market will be able to absorb these tightening measures if they’re implemented gradually, it’s still worth noting that:

• Global liquidity is declining, which has historically been problematic for growth

• If real interest rates climb too quickly, it can derail the equities market (as it traditionally has done), particularly as rates approach 0%

• The current environment creates scope for policy miscommunication that could create volatility in global interest rates and currency markets

The downside risks in the coming quarter are most concentrated in China, where the delayed effects of policy tightening (credit, monetary, fiscal, regulatory) are likely to continue to weigh on growth, perhaps a little more than expected or had been intended. We also expect broader regulatory clampdowns to persist through 2022. Unsurprisingly, investor sentiment toward China remains negative.

Crucially, we believe China isn’t well positioned to tackle risks associated with a stagflationary environment. Chinese macro dynamics will continue to be an important market driver in the months ahead, although it’s perhaps fair to say that investors have a better read of the situation now than they did in early 2021.

Invesco – 2022: A year of normalization

Expect global growth to normalize, remaining above its long-term trend but decelerating to a more sustainable rate as fiscal stimulus is gradually removed. We anticipate that inflation will peak in mid-2022 and then start to slowly moderate, backing down toward target rates by the end of 2023 as supply chain issues resolve, vaccination levels increase, and more employees return to the workforce. We look for the Federal Reserve (Fed) to remain patiently accommodative, with a rate lift-off in the back half of 2022, although other developed countries’ central banks might act more quickly. Finally, we expect volatility will increase as markets digest the transition to slower growth and a gradual tightening in monetary policy.

Bank of America – Markets to peak in 1Q2022

Global liquidity – the key predictive driver of global equity markets since the Global Financial Crisis – is on course for a peak out around March 2022. G-4 central banks’ balance sheets to expand by another USD750bn by that time (from USD30.7trnow to USD31.4trin Mar-22) and then peak out. Markets are likely to reach a high around the same time and then meander around aimlessly, probably with a downward bias as the earnings cycle in China surprises very negatively and the USD remains strong. Measure of global free liquidity – the gap between G-7 M2 and nominal economic growth – suggests a similar timeline.

The earnings cycle in many Asian/EM countries reliant on the Chinese economic cycle might also disappoint – unless, of course, we see a substantial credit easing in China soon, which does not seem to be likely.

Morgan Stanley – Normalization but not back to normal

Strong global inflation for now, but receding next year.

Global GDP to reach the pre Covid path by end 2022

EM central banks started tightening in 2021, DM central bankers to follow in 2022.

Nomura - Supply constraints to morph into an export-led demand downturn in Asia

The emergence of the Omicron variant has increased uncertainty, but we see Asia’s bumpy upcycle extending into early 2022. Our bigger worry is demand. We expect an export growth downturn to begin from mid-2022 and are more circumspect on the rotation into domestic demand.

The inflation rate will likely edge higher, but the underlying theme will remain one of benign inflationary pressures and gradualism on monetary policy normalisation. Alongside an export downturn, high debt and scarring effects, we see lower terminal policy rates in this cycle.

China: We expect economic growth to slow sharply to a below-consensus 2.9% y-o-y in Q1 2022 and 3.8% in Q2, before Beijing’s pain threshold is triggered.

India: Higher CPI inflation will trigger faster policy normalisation (100bp, even as scarring effects weigh on growth starting from mid-2022.

Korea: Japanification risks are rising. We expect growth to disappoint, the BOK’s rate hiking cycle to end in January and two rate cuts to ensue in 2023.

ING Bank – Another difficult winter for Eurozone

Even before the appearance of the Omicron variant, the number of Covid-19 infections in the eurozone was rising rapidly, pushing several member states to reintroduce containment measures, with Austria even returning into full lockdown. As we expect more countries to tighten measures, growth is likely to slow significantly in 4Q and 1Q 2022, with a negative growth figure in one quarter not impossible. But on the back of booster shots and antiviral drugs, a strong recovery might follow, potentially leading to 3.8% growth in 2022.

Inflation is expected to drop below 2% towards the end of 2022, with the average for the entire year staying above the ECB’s target. As the medium-term inflation outlook has become more uncertain, the ECB is likely to be more cautious in its forward guidance. The Pandemic Emergency Purchase Programme will end in March, but a small transitional programme could be introduced to smooth the tapering process. We now see a first rate hike at the end of the first quarter of 2023.

UBS – Discovering the new normal

Financial markets face a Year of Discovery, as we find out what “normal” rates of growth and inflation look like, and how economic policy responds, after two years dominated by the effects of the pandemic. It will be a Year of Discovery for many individuals, too, as we rediscover lost pleasures while considering the enduring impact of the pandemic on our lives, goals, and values. The year ahead presents an opportunity to align your portfolio with the key trends impacting our world, and with what matters most to you.

We expect currently elevated rates of inflation to subside over the course of 2022, as supply-demand mismatches resolve, energy prices stabilize, and labor market frictions ease. This should be supportive of equities, by alleviating risks to corporate margins and reducing the likelihood that interest rates will need to be  hiked quickly. Nonetheless, the process of discovery of a new balance between supply and demand will create uncertainty that investors will need to navigate.

World economic growth may remain well above trend in the first half of 2022, followed by normalization in the second half, as reopening completes, excess savings are spent, and emergency stimulus measures are withdrawn.

We start the year with a positive stance on equities, and particularly the winners from global growth, including Eurozone stocks, though slower growth over the course of 2022 should also start to favor healthcare, a defensive sector. Low rates, yields, and spreads speak in favor of a continued hunt for “unconventional” yield. We also have a positive stance on the US dollar. Looking longer-term, we see opportunity in disruptive technologies—artificial intelligence (AI), big data, and cybersecurity—and in investments related to the net-zero carbon transition.