Pandemic pressures

The latest Omicron variant is yet to show how much it will impact the global economy. Although most expect its negative force to be short term, it will undoubtedly exacerbate supply chain disruption and this will have a knock-on effect on inflationary pressures.

On the other hand, eventually, we could see Omicron turn into a positive. Because it is proving highly contagious, so far the Omicron variant appears to be helping to disperse the more dangerous Delta strain.

Although cases are up, hospital admissions are not. The majority of those who have had Omicron have suffered relatively mild symptoms. The chart below, which shows the number of cases in London alone, is a helpful illustration of how this is playing out.

Source: Ft.com – data taken from the UK government Covid-19 dashboard.

Meanwhile, global vaccination programmes continue to roll out and the introduction of the Paxlovid pill should help to improve the odds of recovery for those who get seriously sick.

Optimists hope that the combined effect of the milder mutations, vaccination programmes and introduction of new treatments will help relieve pressure on the service economy and benefit the job market, which should help give asset prices a boost.

Inflationary pressures will play a key role in markets in 2022 and have forced the hands of monetary policymakers around the world

The main inflationary pressures have been caused by:

• Surging demand as economies reopen
• Labour and materials shortages
• Higher energy prices, especially in Europe
• Expansionary fiscal and monetary policies through the pandemic
• Other factors caused by Covid-induced distortions.

These pressures are expected to ease during 2022, but certainly not disappear entirely. A major risk to this view is if these pressures more permanently affect wage negotiations, which could fuel more persistent price increases.

Although few are anticipating a return to 1970s-style stagflation, many expect inflation to remain elevated across developed markets. While inflationary pressures are likely to ease as supply chain issues gradually resolve, firms are split over how transitory inflation will be.

The biggest risk for markets lies with potential monetary easing missteps

Central banks will need to maintain a careful balance between keeping inflation expectations under control while allowing support for economic growth.

Inflationary pressures have put the focus on monetary policymakers, who will need to tread carefully in both implementing policy actions and how these are communicated. The hope is that central banks will resist overreacting and remain conscious of the risk of inflation feeding through into more persistent shifts in wage and price increases.

Interest rates in 2022

Money managers, investors and consumers will all be watching interest rates in 2022, because it’s these rates are the primary and most effective monetary tool available to policymakers to combat rising inflation.

Although higher interest rates typically mean that savers get more return on their cash, on the flip side it becomes more expensive to borrow. This means that some people will save more and spend less, which can help keep inflation in check.

In December 2021, the Bank of England (BoE) increased the base interest rate from 0.1% to 0.25%. This was the first time interest rates had been hiked in more than three years.

With UK inflation currently above 5% – its highest level in more than 10 years – and expected to reach 6% in April, gradual interest rate rises are likely in 2022.

Rocketing energy prices have added further fuel to the fire

Following lockdown in 2021, there was a surge in demand for energy. This helped to fuel inflation figures.

Soaring energy prices have seen almost 30 UK providers go out of business in the past year, causing consumers to see a sharp rise in their gas and electricity bills.

Unfortunately, this problem is unlikely to be short-lived.

According to Dr Craig Lowrey, a senior energy consultant at Cornwall Insight, “The continued increase in gas and electricity wholesale prices, [means] our forecast for the default tariff price cap has risen to approximately £1,800 per annum.”

With the current cap set at £1,277, which came into force in October 2020, this prediction is a rise of nearly £600. And Lowrey’s figures don’t take into account the spate of energy suppliers going out of business.

With concerns over energy supply availability for the coming winter and wider geopolitical issues that may affect gas European supplies, in particular, the wholesale markets are experiencing renewed volatility.

Supply chains are still playing catch up

Supply chains remain knotted up, and few would like to predict when this may resolve.

This chart, from the New York Fed, tells a graphic story of the pressure the global supply chain is under:

Source: New York Fed

While some supply constraints are starting to ease, most are still clogged up. Although some financial analysts expect a brutal 2022, in terms of supply and demand, others are anticipating some relief in the second half of the year.

Even the most optimistic financial experts aren’t expecting a full return to normal during 2022, although they do expect normalisation in certain specific sectors.

Use insight to inform decisions and invest for the long term

Recently, markets have been choppy to say the least. This is reflective of the fact many are still undecided on whether the darker days of the pandemic are now a thing of the past.

However, we believe we are in a transitionary phase. Investors are still grappling with certain aspects of the economic recovery as we gradually return towards something more like a pre-Covid environment.

In the short term, this means that certain investment styles can fall in and out of favour quickly, but it is important to remember that longer term trends don’t play out overnight.

The problems we have talked about here are global issues that have a knock-on effect on the world economy and stock market movements. This insight can be used to inform investment decisions.

The secret of success is to recognise and understand these key issues and consider the long-term prospects in light of these events, rather than make rash decisions based on short-term noise.

The most important thing to remember when you invest in the stock markets is that investing is a long game.

We are optimistic about return prospects in 2022 as we continue on the path of recovery and positive investor optimism starts to gather momentum. Needless to say, there will inevitably be a few speed bumps along the way.

While there’s no hard and fast rule about how long you should hold your investments, ideally you should consider five years the minimum. For the best chance of benefiting from long-term compound growth, you should expect to remain invested for 10 years or longer.

Get in touch

If you are interested in learning more about how you can profit from expert insight to maximise and grow your wealth during 2022, get in touch.

Email enquiries@bowmoream.com or call us on 0203 617 9206.

The value of your investments can go down as well as up, so you could get back less than you invested.

Past performance is not a guide to future performance.

Bowmore Asset Management Ltd is authorised and regulated by the FCA.