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Inflation, Tapering, Geopolitics, and More -Breaking

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By Carlos González

Investment.com – These last years have marked an important turning point for the market. We have seen a worldwide pandemic and rising inflation in a very short time. There has also been a significant increase in central bank stimulus policy withdrawals.

These are all magnified by rising commodities, currency spinning, higher interest rates, and record-setting indices from the top economies around the globe.

These unpredictable years have left us wondering what to expect for 2022. Although 2022 is predicted to be quiet, how does that compare with the past? Importantly, what are the most important factors for investors who want to succeed in 2022

1. The Real Presence of Inflation

Rising inflation has become a concern in the past few months. It is a growing, real and visible threat. And that’s how most analysts see it, as they point to inflation as among the key factors for 2022.

Andrew McCaffery from Fidelity International’s CIO of Asset Management, says that despite the fact that central banks have said that inflationary pressures may be temporary, prices will continue to rise due to de-globalisation and supply chain bottlenecks.

This means that there won’t be any temporary inflation. In 2022, it seems like we’ll have some inflation.

Ingrid Kukuljan is Head of Sustainable and Impact Investing for Federated Hermes (NYSE.). “Inflation was one of the major concerns of investors going into 2022,” she said. We believe that prices will rise as a result the global supply chain disruptions. The current inflationary panic will be exacerbated by this, as well as an increase in demand from the global reopening, and statistical base effects.

Given this scenario, Pedro del Pozo, director of financial investments at Mutualidad de la Abogacía, echoes that inflation will remain “the main economic unknown for the coming months.” The expert says that rate curves have been flattening which means that it is very obvious that the market assumes these potential rate increases will kill inflation and, possibly, in part, future growth.” He warns that it will be a “very important point to keep in mind in 2022 because it will impact both the bond and the equity markets.”

Commodities: What Can They Do?

Over the past year, commodities have played a major role in the rise of inflation. 

Experts point out that commodities have performed well in recent years due to their complementing other asset classes. Since the start of the pandemic in January 2009, the Bloomberg Commodity Index(BCOM) has increased by nearly 60% and 24% respectively.

Pierre Debru is the Head of Multi-Asset Solutions at WisdomTree. He explains that commodity baskets are more resilient in recession’s early phases, which is when equity markets suffer most. In the later stages of an economic expansion, when stocks generally lose their second wind, they also do very well. That is what we’re at right now and likely to be for most of 2022.

3. Tapering and Interest Rates

Although the message from top central bankers had been playing the “ambiguity” card for months, their most recent meeting has clarified much of what was happening. The conclusion in this regard is that even though significant decisions were made, December’s important meeting did not surprise the market. 

Thus, A&G points out that “the focus of the meetings has clearly been more restrictive or hawkish, which seems to mark the future of upcoming meetings.”  On the other hand, A&G’s professionals point out that “not all central banks are at the same point in the cycle, with the Anglo-Saxons leading the way for the ECB from next year onwards, especially if price expectations continue to surprise on the upside.”

Víctor Alvargonzález, founding partner and strategy director of Nextep Finance, comments that “the Federal Reserve members’ opinions (the famous ‘dot plot’) place interest rates at around 1% at the end of 2022, once the three rate hikes they plan to carry out have been made. This is not a rate that is going to slow growth. The economy will grow by 4% next year. 

James McCann (deputy chief economist, Aberdeen Asset Management) said that “the Fed’s recently announced decision was an example to investors of how rapidly central banks’ policies can change.” The Fed is willing to change its policy signals faster than the Fed has indicated if inflation continues surprise the upside. Markets will not be affected by this.

4. A Silent War in Geopolitics 

A non-economic issue is another important consideration that will mark 2022. There are numerous open issues between countries that could cause a chain reaction. This could result in unpredictable outcomes.

Chris Iggo (CIO Core Investments of AXA Investment Managers) says that “I think it will be hard the first months of 2022.” There are geopolitical issues that have grown over the COVID-19/inflation problem and China’s position towards Taiwan. Things could turn ugly in Europe. In the UK, the government faces multiple attacks and there was a French presidential election.

Increased geopolitical tensions between the US, China and other countries seem to favor certain countries such as Vietnam and India that can benefit from restructuring their supply chains. Private credit strategies that focus on Asia-Pacific may be well-positioned in such an environment,” said Emmanuel Deblanc (DE: Global Investors), Head of Private Markets, Allianz.

5. Then, there’s COVID-19

Covid, and all its variations in the future, must be taken into consideration by 2022. It was two years ago that the pandemic broke out, which set off many of the other factors mentioned above. Markets are still being frightened 24 months on from the outbreak of the virus. Even with the availability of vaccines, it is still a serious problem. 

According to Allianz Global Investors, economic growth is likely to slow down after the recovery associated with the “base effect” observed in 2021. COVID-19 related uncertainty and supply chain bottlenecks are likely to weigh on growth, and will be a major source of price volatility.” 

That unpredictability, both in Covid’s direct impact and in secondary factors as the economy ‘re-normalizes’ could make for opportunities and also volatile times on the market in 2022.

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