SAT 01 JAN, 2022-theGBJournal– As the world economy prepares for 2022, the press is full of experts pontificating on what the financial markets will do next. The honest answer “I don’t know, it depends” would a big let-down and therefore a bad answer.
The second worst response is to give a 60% probability to events unfolding i.e., there is a 60% chance that the markets will go up in 2022. Sixty is a sweet spot, high enough to look serious and low enough to give an easy get-out if it does not happen. The answer of last resort is to predict volatility. Markets will neither be higher or lower, necessarily but more volatile. Normally, this is a dodge for “I don’t know” but in markets-speak.
With the usual geopolitical risks regarding Ukraine and Taiwan, we have market uncertainties regarding Inflation, interest rates and China. Going into 2022, there are three economic issues that really matter:
Top of the list must be the pattern of demand. 2021 saw the biggest demand shock for goods in 75 years. It was met by a supply surge, but no supply surge could realistically meet this spike in demand. The drivers of that demand are clearly fading and evidence of that is now starting to show up in the economic data. The noise of a child tax credit in the US is only adding to the perception that lower-income demand is moderating next year. The normalization of demand in 2022 will be as big a story as the demand surge in 2021 and it will affect disinflation forces, relative economic performance, and the labor market.
Second, throughout the pandemic, markets have consistently underestimated the ability of people to adapt in the face of adversity. This was the first pandemic with a hashtag and so fear has spread widely. In the wake of the fear, people have, however, changed their behaviours and economic practices.
The challenge is that many of these changes are not necessarily being properly captured in conventional data, especially as survey evidence gets less reliable and more politically polarised every year. Investors who want to really understand the potential for returns will need to look beyond the headlines and get their hand dirty with data or alternatively, of course, pay economists to do the dirty work for them.
Finally, the structural changes of the fourth industrial revolution have been accelerated by both the pandemic and the aftermath to the pandemic. These are permanent changes. Now that my mother has discovered the joy of ordering on the web, she is sticking with ordering her supplies online.
As economies climb back onto the economic cycle in 2022, it is important to distinguish structural changes are distinguished from cyclical issues around demand normalization. Treating a structural problem with the cyclical policy very rarely ends well, as the UK in the 1970s and Japan in the 1990s have shown. It is also important to recognize that policies which have driven economic success in the past thirty years are unlikely to drive success in the next twenty years. This is the biggest structural upheaval since the first industrial revolution and indeed it reverses some of the social changes of that first revolution. Its importance as a structural break in economic relationships cannot be stressed enough.
Now, where are the markets headed? Markets are not predictable in the short-term.
We prefer to follow companies with good management delivering on their promises in sectors that benefit from growth in the current transformation of the global economy. Good companies, history shows, always deliver above-market returns even if occasionally we must deal with temporary weaknesses in their share prices. Good selection of companies and patience are the best advisors to beat the uncertainties of the future.
Rebecca Ellis is a Personal investment advisor, based in Zurich rebecca.ellis@pomonawealth.com|pascal.crepin@pomonawealth.com
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