Markets in 2022: A mean, green, inflation machine?

By Coutts asset management team

After a strong year in 2021, investors will need to beware of headwinds in 2022. Even though economic growth is poised to continue above its long-term trend, we expect market volatility to remain elevated: a phenomenon we have already noticed in the first month of this year.

Why are markets so volatile? Firstly, there is Covid, but hopefully we all will be able to move beyond it this year. Improvements in treatments and vaccines have been significant in the last year. Attention will increasingly turn to fundamental data and while earnings remain solid, declining consumer confidence and rising inflation have injected uncertainty for the outlook. We believe the ongoing supply chain issues will normalise as 2022 draws on, and inflation should decline as we reach the end of the year.

With Covid-battered countries less willing to use monetary stimulus to deal with these issues, the markets will be extremely sensitive to the possibility of rate hikes, and we recommend investors take a long-term view on their investment goals as the year brings a rollercoaster ride for the markets. Especially as geopolitical events like Russia-Ukraine tend to inject short term angst which historically do not change long term trends.

That said, we believe there are several main themes that investors should be aware of in 2022.

 

Sustainability

COP26 may be last year’s news, but the commitments made in 2021 will drive sustainable investing in 2022. We are expecting governments to come out with increased regulations and standards on net zero and emissions between now and 2025, to hit their COP commitments. This will impact the valuation of companies and funds.

We’re expecting investors to show their green colours more than ever before, forcing votes on climate shareholder resolutions, and insisting on transparency around voting process and engagement.

The UK’s issuance of green gilts, in which Coutts invested £450m, is expected to spawn a number of similar products supported by a diverse range of sectors, issuers and countries. Some will focus on green themes, others on social characteristics.

In this climate, it is more important than ever to incorporate the risks and opportunities arising from climate change into the investment process when managing portfolios for the long term, and this is where Coutts is leading, ensuring ESG criteria is part of our DNA. A certified B Corp, we engaged with more than 500 countries across the UK, Europe and North America on sustainability in 2021, and have decreased the carbon footprint of our equity investments since 2019. This focus will continue in 2022, and we believe will help our clients to do well in the long term, while doing good.

 

Inflation

 The spectre of inflation is a bogeyman spooking the markets, hitting 5.4 per cent in the UK at present and due to rise as the energy price cap is lifted in April. Households are feeling the pinch as everything goes up in price, from petrol, to houses, to coffee, but we’re not as pessimistic as others about the effect of rising prices.

Inflation will likely stay at elevated levels in early 2022 before gradually falling back towards the end of the year, while supply bottlenecks and energy prices, which help to increase costs, should ease gradually. We don’t think that inflation will become unanchored globally and a turnaround in inflation could improve consumer sentiment.

 

Global volatility

 Tensions in the Ukraine are already affecting markets, and we believe that those who give careful watch to global politics will be rewarded. Counterintuitively, though, it is the contrarian investor, not the early exit-er who catches the worm. This year, we maintain our approach of being aware of the nature and financial impact of major geopolitical events but to be ready to go against the noise and the crowd and buy into markets opportunistically.

 

Brexit

On-going tensions between the UK and several European countries, as well as some well publicised labour shortage issues in the UK, have served as a reminder that Brexit as an economic narrative did not end on the 31 of December 2020.

Inflation will affect the UK more than other countries, because of Brexit, because it is likely to accentuate the issues of supply chain disruption. Add to that rising taxes and it makes the Bank of England’s actions hard to call, which may in turn affect sterling and gilts.

While the UK market looks cheaper than some rivals and the economy recovered strongly in 2021, these issues will continue to affect asset prices in the UK in 2022.

 

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