Banca March expects more moderate growth in 2022 with inflation as the main headwind
01 February 2022 Category: Banca March
- The global economy will grow at a pace of 4.2% - versus 5.6% in 2021 - as the cycle bears witness to the tapering of central bank stimulus measures, the economic slowdown in China and supply chain disruptions. Spain will continue to lag, but the recovery will gain traction and GDP will grow by 5.6%.
- Inflation will begin to taper off as of the second quarter, thanks to a likely moderation in energy prices and improvement to supply chain disruptions. In the short term, inflation will remain high; it will not return to central bank target levels until the tail end of the year.
- This macroeconomic outlook augurs greater volatility ahead, but equities remain the most compelling asset class, so Banca March experts advise increasing cyclical exposure, especially in the financial sector.
- Banca March emphasises the need to adapt investment strategies to sectors offering long-term growth potential. There are opportunities to be found in the energy transition, technology and digitalisation, all sectors that stand to receive a substantial share of the EU recovery funds.
- Against the current backdrop of rising inflation and low interest rates, they recommend investing in real assets, as well as seeking to harness the illiquidity premium by investing in unlisted companies and the loan market.
The bank's Market Strategy Team expects the global economy to shift into a more moderate growth phase in 2022. The 50-year record of 5.6% growth chalked up in 2021 will taper to 4.2% this year, which is the second highest growth rate of the last decade and significantly higher than the historic average of 2.9% since 1980.
In this phase, China - which will grow at a pace of 5% versus 8.1% in 2021 - will contribute less to global growth, and US GDP growth (4%) will outperform the eurozone (3.8%). Despite expected growth of 5.6% this year, the economic recovery in Spain will continue to lag behind; it will take a year longer than the rest of Europe to recovery from the impact of the pandemic, and will not see pre-Covid GDP rates until at least the end of 2022.
2022 will be characterised by the gradual tapering of central bank stimulus measures and the resulting increase in interest rates. The extensive scale of the monetary stimulus measures deployed in the pandemic means the tapering process is likely to be swifter than in previous crises. In the Fed's case, the experts at Banca March expect that after ending its asset purchases in March, the central bank will hike rates four times this year, which will be the quickest post-crisis increase in the price of money since the 80s. They also estimate that the Fed will stop reinvesting bond coupons in the fourth quarter of this year. In Europe, rate hikes will be delayed until December at the earliest, with a further two increases to come in 2023.
In any case, Banca March specialists believe interest rates will remain low and economic growth will remain robust, underpinned by consumer spending – driven by unprecedented savings levels and added impetus from the services sector –, increased investment – already at 2018 levels in the US – and public spending geared towards the energy and digital transformation.
Inflation: the main headwind
This constructive outlook for 2022 is not without risks, and inflation is the largest potential headwind facing the global economy. Current inflation rates of 7% in the US and more than 5% in Europe are at their highest point since the 80s. Even so, 60% of these increases are attributable to the impact of a highly unique post-Covid recovery which will gradually dissipate over the course of the year, driving down inflation, albeit not to pre-crisis levels. The increasing normality in supply chains should begin to be reflected clearly as of the second half of the year.
Banca March analysts expect that oil prices will remain high, with supply continuing to fall short of demand by around two million barrels a day, but that the pace of growth in energy costs will begin to slow; this will allow the base effect to start tapering off in H2 2022 and inflation to close the year in the region of 2% in the eurozone and 3% in the US.
As well as inflation, another factor that could impact economic growth this year is China and its eventual contribution to global GDP, given the impact of the countercyclical measures applied by the country in 2021, its hefty exposure to the real estate market and its zero tolerance approach to Covid. The Chinese government does, however, have room to manoeuvre, as in relative terms it has rolled out far more conservative stimulus measures: the fiscal stimulus measures deployed to date stand at 5% of GDP – three times less than in Europe and five times less than in the US – and the Bank of China has barely expanded its balance sheet in relation to GDP, whilst Europe has swelled its balance sheet to 31% and the US to 20%. The measures deployed by the Chinese authorities to date have been "contained", and Banca March expects them to roll out heavier artillery over the months ahead.
Volatility is on the rise
Despite the likely tapering of central bank stimulus measures, real interest rates will remain negative in most parts of the world. Fixed income is not, therefore, a compelling option, as not even high yield credit will be able to offset the loss of purchasing power, posting poor returns and asymmetric risks in the euro yield curve.
Once again this year then, equities will be the most attractive asset class, after posting extremely strong gains in 2021. Despite the popular opinion that good years for equities are followed by bad, the evidence shows that this is not the case. The S&P 500 is a perfect example: on 83% of occasions, the index has posted annual gains of over 11% following after a year of 25%+ growth.
The Banca March Market Strategy Area is expecting a transition towards an intermediate phase of the cycle, where a return to monetary normality will mean investors need to be more risk-aware, as volatility has awoken from its slumber of 2021, when equity market dips were virtually non-existent and extremely shallow. The best strategy for the months ahead is still to stay invested, weather any spikes in volatility and position portfolios for higher interest rates, leaving more room for manoeuvre now to harness any buy opportunities that arise.
Banca March's approach is to position portfolios with a more balanced exposure across cyclical and defensive sectors. Against the current macroeconomic backdrop, with interest rates beginning to climb, the financial sector – which is trading at attractive valuations – offers striking potential.
From a longer-term perspective, the Banca March team continues to like names and sectors linked to the energy transition, as well as the digital and technology transition; these sectors are recommended as they are likely to garner a substantial share of the public aid distributed out of EU recovery funds.