EFG’s 2022 perspectives: Global growth set to continue, inflation to be transitory

Inflation will be the main concern for central banks when setting their monetary policy in the coming year. EFG's investment experts and economists expect high inflation to be a transitory phenomenon but believe there is a risk that central banks make a policy mistake. In the US, they anticipate that the Federal Reserve could increase rates in the second half of 2022. The Federal Open Market Committee (FOMC) could begin raising rates cautiously and then continue to tighten policy throughout 2023. In EFG's view, the main challenge for markets will be whether the Fed is ever able to raise rates beyond the 2.5% peak, which was reached at the end of 2018. Viewed overall, it appears likely that US rates will stay low for the foreseeable future. As far as other central banks are concerned, we expect the Bank of England to further raise rates in 2022, while the European Central Bank and the Swiss National Bank are unlikely to move on rates before 2023.

As far as financial markets are concerned, EFG's view is that equities continue to offer the best opportunities for investors over the next six months or so. This is due to continued stimulative policies in advanced economies, including negative real interest rates and fiscal measures. In addition, although the tapering of asset purchases is expected in 2022, overall fiscal policy will be supportive of risk assets. Valuations are more of a concern in the US, although American companies are likely to report the best earnings growth. This means that US stocks are more vulnerable to "shocks" as we move forward. EFG has a non-consensus view on Japan, as valuations, earnings growth and the cheaper currency make Japanese companies very competitive. Although this market is not popular with investors at present, we find it compelling. Looking to China, EFG is waiting to see whether Covid lockdowns and challenges in real estate markets could lead to a prolonged slowdown in economic conditions. This could create headwinds for commodity prices, as China is the largest marginal consumer of raw materials.

Overview of the EFG's top-ten convictions for 2022:

1. Global growth above trend: We expect global growth to stay strong in 2022, at around 4.5% in advanced economies and 5% in developing and emerging economies. Growth will be above pre-Covid levels but will weaken going into 2023.
2. Spending spree: As Covid concerns recede in 2022, consumers will be willing to spend more, particularly from their accumulated savings. Spending on leisure and healthcare will be two key areas. How quickly that catch-up spending occurs depends on the Covid situation but EFG believes consumer confidence is steadily recovering.
3. Emerging markets go digital: Emerging economies have typically lagged behind advanced economies in the move towards digitalisation. On many fronts, and with the basic building blocks for greater digitalisation already in place, we see emerging economies making substantial progress in 2022, giving rise to attractive investment opportunities.
4. Inflation proves transitory; risks of a policy mistake: The hardest call to make for 2022 is whether or not inflation will prove transitory. On balance, EFG believes it will, with US inflation dropping back to 2-3%, but not until the second half of the year. In general, higher inflation in the US, the UK, the Eurozone and Switzerland is likely to prove transitory, decreasing towards 2% again in the second half of 2022. Inflation in Japan will only briefly rise above 1%. There is a risk, however, of central banks making a policy mistake.
5. Savings and green infrastructure: For several years, real interest rates have been kept low by a savings glut. Now, there is an urgent need to deploy those sayings to finance the green infrastructure. 2022 will be a year when that imperative is clearly recognised.
6. Japan's quarter-century convalescence: Japan's economy is continuing its recovery and EFG thinks the equity market can make further progress in returning to its 1989 peak. Since the low point that was reached in 2009, the recovery has been steady. Although the overall market is still around 20% below its peak in yen terms, it has regained its previous peak in US dollar terms. EFG thinks the market can make further progress in 2022.
7. Commodities - spotting the winners: After a strong increase amidst supply shortages in 2021, EFG believes commodity prices will ease back in the year to come. However, 2022 is set to be a year in which the overall trend in commodity prices may be less important than spotting individual winners. Structural factors - especially the transition to clean energy - favour strength in commodities such as copper and cobalt, given their use in electric vehicles and the new energy infrastructure.
8. Tougher time for earnings: 2022 will be a more normal environment for corporate earnings, after the sharp swings seen in the last two years, with a very negative 2020 and a very positive 2021. The biggest positive surprises are likely to be in Asia − but the US market remains the one to beat.
9. Fixed income opportunities remain: Upward pressures on government bond yields will depress total returns. The starting level for yields is low in nominal terms and negative in real terms. It seems likely that continued upward pressure on inflation coupled with reasonably robust economic growth and the demands for clean energy infrastructure spending will push up benchmark government bond yields in 2022. In this challenging environment, EFG sees an attractive opportunity in emerging market bonds, both in hard currencies and local currencies.
10. Globalisation, reshoring and new trade patterns: Rebuilding the global trading system will be a key area of focus in 2022 with an emphasis on three areas: First, although many see globalisation as being predominantly about the trade in physical goods, the service industry is very important. Second, the reshoring of some production is taking place. The need for greater supply chain resilience and lower carbon emissions are two important factors driving this development. Third, national security issues are important in diversifying manufacturing bases, not least in the electronics industry.

Download the full EFG's 2022 Outlook publication here.