In focus

QEP: Seven key themes for 2022 and beyond

Alongside the terrible human tragedy that has unfolded since Russia’s invasion of Ukraine, the war has also exaggerated many pre-existing trends. Some include the upward pressure on commodities and further disruptions to global supply gains at a time when inflationary forces have already been elevated. The market has not widely observed stagflation (slowing economic growth at a time of accelerating prices) since the 1970s. At a high level it is not associated with rising equity markets due to the resulting squeeze on profit margins. Historically speaking, it also has not been a favourable environment for bonds; commodities and safe havens such as gold are regarded as the key beneficiaries.

This poses a big conundrum to central banks that do not want to choke off the post Covid-19 recovery, but also need to prevent inflation from affecting an escalating wage-price spiral. Interest rates are ultimately a blunt weapon, however, it is now widely believed that the US Federal Reserve (Fed) is behind the curve and but is doing its utmost to get back in the game. Current market expectations suggest a Fed Funds Rate north of 3% (currently 0.25%-0.5%) by early next year alongside a more aggressive tilt to quantitative tightening, which will equate to a further 0.25% rate hike.

The risks of a US recession have clearly moderated, although around 30% of market participants believe a recession will ensue. The recent inversion of the US yield curve (10-year/2-year) is another ominous portent as it has a good track record of predicting future recessions, although the lags can be long (the median lead time from the last six inversions is 18 months).

In terms of the market’s reaction to both the war and the Fed’s policy pivot, commodities have already ratcheted higher and bonds have sold off sharply while equities seem to be in a state of denial. Against this uncertain backdrop, here are the seven key themes we are watching for in the months (and in some cases years) to come.

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QEP: Seven key themes for 2022 and beyond


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