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.