Outlook 2022: the main questions of concern to investors

Twenty-two will mark the third year that the global economy will be confronted with the Covid-19 pandemic. As governments and businesses gradually shift from managing a pandemic to managing an endemic, emergency stimulus measures are likely to be scaled back, changing the investment landscape in 20221.

Staying invested remains crucial. To help investors better understand and navigate today’s investment environment, Mr. Tai Hui, Chief Market Strategist for Asia-Pacific, shares our perspectives on the key issues of concern. Investors.

1. Will inflation slow down?

The inflation challenge varies across economies. For example, we are seeing consumer price increases here in Singapore and in the United States as well, but it has remained small in China. At the same time, central banks in Europe and Japan continue to view the recent upturn in inflation as transitory.

Given the influence of the Federal Reserve (Fed) in the global investment market and the fact that inflation appears to be more of a challenge in the United States, it is worth asking if inflation would decline in 2022. .

Some elements of the inflation peak are transitory. For example, rising energy prices are directly fueling gasoline and transportation costs. Still, the long-term supply and demand balance should limit how far energy prices can rise. The rise in prices of consumer items due to bottlenecks on the supply side is also expected to ease over time. However, the growth in rents, housing and wages could create more persistent inflationary pressures.

Overall, headline inflation could surpass 2021 highs, with US inflation expected to drop from 5% to 6%. However, the underlying trend of firmer inflation may continue and, given the strong recovery momentum and some supply and labor market distortions, core inflation may remain. above the Fed’s 2% target until 2022.

2. Will central banks become more hawkish?

Alongside the Fed, which will likely raise interest rates in 2022 due to more persistent inflationary pressures, several central banks in developed markets have moved away from their ultra-accommodative monetary policy as the economic recovery gains ground. These include the Bank of Canada, Bank of England, Reserve Bank of Australia, and Reserve Bank of New Zealand.

Yet not all central banks in developed markets are hawkish. The Bank of Japan continues to forecast below target inflation for the next two years, while the European Central Bank takes a patient approach in normalizing its policy.

Some economies in Latin America, Central and Eastern Europe are already on the path to tightening, while Asian central banks have reacted more quietly. Since most Asian economies are still in the early stages of economic recovery, Asian central banks may view higher inflation as temporary and may allow policy rates to remain favorable until 2022.

An exception is China, where economic momentum slowed in the second half of 2021. Instead of just using lending rate cuts or reserve requirements to boost growth, the People’s Bank of China could rely on open market operations and industry-specific measures to provide the financial system with adequate liquidity.

3. Will the Fed start raising interest rates in 2022?

The Fed’s latest announcement in December indicated that it would end its bond purchases during the pandemic in March 2022 and likely start raising policy rates in 2022 as it faces higher inflation and looms large. The economy is approaching full employment.

The pace of policy rate hikes over the next two to three years is arguably more important than the timing or magnitude of the first hike. The Fed’s median projection suggests around three hikes of 25 basis points each in 2022 and 2023, with two more hikes in 2024, reaching 2.1% by the end of 2024, with a long-term rate at 2, 5%.

American monetary policy3


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