Policymakers worldwide are getting concerned as the supercharged price readings increasingly indicate that inflation is broadening out beyond goods and services associated with economic reopening. If inflation keeps widening to even more categories, expectations of higher prices may get entrenched. However, if the primary cause of inflation is linked to the disruption caused by the pandemic, a premature withdrawal of stimulus, both fiscal and monetary would curb economic recovery and job growth. In the developed countries like US, Canada, EU, Japan and UK, we are seeing the central banks adopting a tightening monetary policy stance. This is probably in response to wages increasing and some components of Consumer Price Index (considered to be sticky and sustainable in the long term) rising. To us, we believe US would be seeing a higher inflationary reading than the past when inflation struggled to get past 2% per year, but it should be lower than the high readings of about 6% in the past few months. Despite the Fed’s more hawkish tone, it is still committed to seeing further progress towards maximum and inclusive environment monetary loosening environment, and will likely remain wary of overtightening.
When “Omicron” variant was discovered initially in South Africa, financial markets’ instant reaction was to turn bearish. We have to look to history to guide us on how the future will look like. The 1918 Spanish flu has over a period of time evolved into less dangerous strains. They are still deadly for some people but far from pandemic proportions and no longer trigger panic reactions. Secondly, after almost 2 years since the Covid-19 began, we have developed vaccines to combat this virus. Everyone in the world knows how to take precautions and are more prepared since its first outbreak. We view the new variant as a speed bump for the financial markets and the world will adapt to Covid-19 mutations, though it will remain a major source of volatility.
China’s monetary policy runs counter to the other parts of the world, with easing a prominent feature. There were news that regulators including People’s Bank of China (PBOC) and China Securities Regulatory Commission (CSRC) have made moves to help ease property developers’ financing in the face of falling equity and bond prices across the property sector. Premier Li Keqiang highlighted that the government will formulate policies based on the needs of market entities and further reduce the RRR in future. The Central Economic Work Conference in early December, highlighted policy stance in accelerating fiscal spending and infrastructure construction and flexible monetary policy and a marginal easing in real estate sector.
The global economy recovered in 2021, but at a hesitant manner. On the geopolitical front, the hope for improvement in relations between US and China did not materialize. We believe 2022 will be a better year economically and the foundations are likely to be laid for a period of sustained and productive transformation. On the US/China relations, the more likely risk is that mutual suspicions may lead to measures in the areas such as trade, technology and finance which would cause economic slowdown.
We would also be keenly aware of the roll-back of ultra-easy monetary conditions and its effects on the markets and economy from 2022 onwards. Investing during the Covid-19 pandemic underscores the importance of diversification, and we will continue to adopt this investment stance with a nuance approach towards avoiding companies with weakening prospects whenever possible.