Happy Old Year … what about the new one?
2021 was good for most investors and we have managed to survive another year with COVID-19 without the complete systemic collapse that some predicted. So, what can we expect from 2022?
Savers
Firstly, some good news for those with savings. Interest rates will increase and already we have seen the Bank of England, banks and other deposit takers start to raise interest rates from their historic lows. Unfortunately the reason for this is not a booming economy, but inflation, which destroys the value of your savings.
Investors
We feel 2022 may not be a year of double digit returns, but instead one of consolidation as markets adjust to higher interest rates and higher taxes, as Central Banks and Governments try to tame inflation and balance the books. Most of the pain will hit the sectors which have benefited most from the low cost of borrowing. For some, such as tech stocks and digital currencies, the hit could be hard, whilst other areas such as residential property should see milder adjustments to valuations.
Global Economy
There are many reasons to be positive. Employment and economic growth remain strong despite the continuation of COVID-19 and Governments’ tax receipts are growing whilst their spending is falling. We see no reason for the overall trend to change, but there will be some issues in individual countries.
China
One such country could be China, where there are huge changes starting to occur. In simple terms, the Communist Party is concerned about two issues. Firstly, the power of businesses, especially tech firms, and their day-to-day influence. Secondly, equality, as they fear that rising wealth amongst the middle classes is at the expense of many migrant workers and less educated people, who are the foundation of the Communist Party’s power.
We will be writing a separate blog on China in the next few weeks, looking at specific issues.
Europe
2022 could be a major turning point for Europe, with two themes bringing focus on the EU’s future. The first is the issue of whether EU or National Law is stronger, with both Poland and Hungary challenging the EU Law’s supremacy. The second potential flash point is the high levels of debt in Southern European countries, where rising Bond Yields may result in markets questioning the sustainability of the debt levels without support from the EU.
United States
Will we have the same President by the end of the year? Mid-term elections will see losses for the Democrats and the pressure for Biden to stand down will only increase before, during and after the elections.
From an economic point of view, the biggest concern is whether US inflation is short term and due to the same reasons affecting the whole global economy, such as commodity price increases, chip shortages and supply chain issues. Or was President Biden’s fiscal policy too much at the wrong time, leading to more long term and locally sourced inflation which will require interest rate rises?
UK
The economy remains strong and flexible and we are optimistic that it can weather most storms but it is becoming clear that Brexit has caused more issues than expected and this will hold back growth. The economic headwinds will only be further compounded by the uncertainty of a fractured political system where neither the Government nor the opposition parties seem to be able to string together a coherent medium term policy for Brexit and COVID-19.