HUB EXCLUSIVES PANEL DISCUSSION 2022 - THE YEAR AHEAD: THIS TIME IT'S DIFFERENT
Panel discussion, hosted by Cherry Reynard, with:
Ellie Clapton – Portfolio Specialist, Multi Asset, Ninety One
Eva Sun-Wai – Fund Manager, Bond Strategy, M&G Investments
2022 promises to be a very different kind of year. The environment of loose monetary policy and benign inflation that has characterised the decade or more since the financial crisis is starting to shift. This has already been seen since the start of January with a dramatic sell-off in technology companies and volatility in the bond market. Will inflation and interest rates continue to be the swing factors for the year ahead? And if so, to what extent do they have the power to surprise markets?
Eva Sun-Wai, lead manager on the M&G Global Government Bond strategy and deputy manager on the M&G Global Macro Bond strategy says: “For bond markets, the key word is still inflation. This year we’re likely to find out whether inflation is transitory or more permanent and this will be a key driver for interest rates and central banks. Can the high valuations for risk assets be sustained as the huge amounts of monetary stimulus are withdrawn?”
She believes it is an interesting time for bond markets. On the surface, they look unappealing, but there has been a significant hike in yields since the start of the year: “The question is whether this improvement in risk sentiment is front-loaded or whether it can be sustained. We have significant supply coming into primary bond markets, which isn’t wholly surprising. Borrowers are getting cash in before rates rise.” The withdrawal of support, plus lots of supply could spell a tough period for conventional developed market bonds. “It is making bond investors nervous,” she adds.
The solution is to be dynamic in duration positioning and inflation exposure. This can help mitigate against a rise in spreads and any further rises in yields.
Ellie Clapton, portfolio specialist within the multi-asset team at Ninety One, agrees that markets are likely to remain focused on the inflation outlook, central bank actions and interest rates in the year ahead. “Interest rates can have a ricochet effect into so many other areas. As such, policy is a hot topic, particularly from the Federal Reserve, and has been the main driver of risk assets in recent weeks.”
“The market has now started to price that in four rate hikes this year. This could be negative for bonds and equities because it raises the discount rate for valuations. That said, it is most challenging for long duration stocks. There is a risk we could see an environment where both bonds and equities sell off at the same time.”
She believes inflation is likely to be structurally higher on average this cycle than it was over the last cycle, given the move to change monetary policy, looser fiscal policy, the shift to onshoring and away from just-in-time inventory management, plus the cost of green infrastructure. That said, many of the forces that have held back inflation in recent decades remain powerful – rising debt levels, ageing demographics and inequality. Also, in the shorter-term, inflation may be lower than many expect because of base effects.
Ninety-One is focused on remaining flexible and adapting to changing market conditions and valuations. Nevertheless, Clapton believes a few elements will be important: “We believe real income will be resilient. We are also looking for equities with high pricing power or positive gearing to higher interest rates. Security valuations will be an important driver of what held in the portfolio.”
The other major risk in the year ahead is global politics. The tension in the Ukraine could bring about a major spike in oil prices. Equally, many countries have elections in the year ahead: there are the mid-term elections in the US, which may shine an uncomfortable spotlight on Biden’s waning popularity. Brazil and France also have elections coming up.
However, even here, inflation may prove important, with consumers influenced by a cost of living squeeze and wage rises. After nearly three decades when investors could sit back and forget about inflation, they won’t have this luxury in 2022.
