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What to expect from 2022 – comments from our Chief Investment Officer

by | Feb 8, 2022

In January, our Chief Investment Officer made some clear and decisive fund changes.

His no-nonsense piece below describes his thoughts and highlights the reasons for his actions:

In the short term the effects of Omicron will impact markets especially until we fully understand the full severity of the variant and its ability to escape vaccines. Over the medium term, inflation and Omicron pose major concerns for investors and policy makers. If there was a massive push towards raising vaccination rates in emerging economies in early 2022, the risk outlook would improve. An end to the pandemic would help restore supply chains and remove distortions to businesses. This would help pull the rug from under some of the near-term drivers of inflation.

In terms of higher interest rates the normalisation process will be gradual. Central banks are unlikely to raise interest rates aggressively while risks surrounding the pandemic and subsequent recovery are uncertain. However, there is no justification for central banks keeping interest rates at pandemic-crisis levels. The world is a long way through the pandemic and the global economy is operating at much higher levels of activity than it was when policy was dramatically eased in early 2020.

What we do know is that 2022 is going to be challenging with bouts of volatility. First, we have the virus to contend with. Secondly, we will be dealing with high inflation and whether another round of disruptions will prolong supply-side induced price pressures. Thirdly, politics and the fact that current incumbent leaders in several western democracies are struggling. Joe Biden’s popularity has fallen, Boris Johnson has suffered a humiliating by-election defeat and is struggling to keep ‘partygate’ out of the news and Emmanuel Macron faces a tough Presidential election challenge. That is without mentioning geo-politics and potential conflict in Eastern Europe and the Taiwan Strait.

On a more secular theme, responding to climate change is going to become increasingly important for investors. While there were a lot of good things to come out of the COP26, the key takeaway is that there is no guarantee that the world is on a path to stop the rise in atmospheric temperatures exceeding 1.5oC by 2050. Thus, both physical and transitions risks will become more material for companies and investors. If we are a long way from global temperatures peaking, extreme weather events and environmental disasters are likely to be more frequent and the impact to businesses more long lasting.

Overall, the transition risks will build as there will become more urgency from policy makers, increased pressure on business models from investors and consumers, and from the technology needs required to shift to low carbon.

Written by Andrew Heath


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