November 13 2021

WAGMI in 2022…at least in first half

In the crypto community, Wagmi stands for We’re All Gonna Make It. Not sure it will apply to the entire economy next year at it enters the late part of a recovery cycle, although the macro setting feels rather favourable at the dawn of 2022.

The big picture is that central banks are not keen to raise interest rates too quickly, as the supply side is kicking into gear and assuaging the logistics concerns that pushed inflation higher. The covid front is being tackled, although it remains a wild card as we approach winter in the Northern hemisphere. The expectations from economists are that GDP growth will continue to be strong in the first part of 2022, with estimates at ~4% for the US, 5% for China, and ~3%+ for the Euro area.

Against such backdrop, assets that benefit from higher disposable income should perform, such as consumer goods companies, and small caps. By geography, the US should remain strong in the short-term thanks to a continued post-covid normalization, and an ever-present fiscal stimulus. In China, the common prosperity agenda and the enormous ambition of Xi Jinping are setting the course on tough regulations, which is shooting in the knee of economic growth for now. The Euro area should eventually see the benefit from healthy growth and higher inflation that could extend into 2H22. Emerging economies for their part will have to establish a balance between a fiscal balance, as always, and potential monetary tightening, should the US start to increase rates. In particular, Asian economies could enjoy a revival of international tourism that remained mostly subdued in 2021.

Commodities is the side show that will continue to surprise until supply chains are not functioning 100%. Besides, major industrial shifts are at play in new energy and automobiles, which are resulting in demand spikes for a certain kind of raw materials. The price pressure should subside

Overall, the chase for cyclical, and risky assets should be prolonged into 2022. It looks like we are still playing a game of yield compression until the chickens come home to roost. The current picture is that real yields are still at rock-bottom. As per Goldman Sachs, 10-year TIPS are at -1%, A/BBB credit yields are at ~1%, and S&P500 earning yields at ~2.5%. Not a very exciting picture, but one that shows that US equity valuations are not that stretched compared to bonds.

At the tail end of the distribution of our economic scenario are political risks, ever present in the US-China spat. These can come back to haunt markets and have side impacts on the conduct of monetary policies to come. Main question for months and years to come is: can we ever get out of globally low interest rates? Good luck with that.

360 Advisory – Markets