Here are some themes we expect this year.
Inflation will remain a key issue
Inflation is likely to remain one of, if not the key issue that investors will face in 2022. The prices of goods and services have risen to decade-highs, due to supply shortages brought about by the global pandemic, as well as tight labour markets the world over.
While we expect these pressures to ease, inflation is expected to remain at above-average levels, meaning interest rates will have to rise to take the steam out of the economy. Of course, a key risk is that inflation stays high, meaning central banks may be forced to raise interest rates even faster.
Central banks to raise interest rates, but not at the same time
When the global pandemic hit in early 2020, most major central banks cut interest rates in unison to support the global economy.
As economies recovered, many also expected them to begin raising them at around the same time. However, this has not been the case.
Central banks appear to be at different stages of their interest rate cycle. For example, interest rates have already moved higher in New Zealand and the UK, while in the US the Federal Reserve has just started talking about it. Meanwhile, in Europe and Australia, central banks appear to be some way off from taking action.
Learning to live with COVID in New Zealand
New Zealanders enjoyed new-found freedoms in 2021 thanks to high levels of vaccination, the introduction of vaccine passports and the promise of a gradual reopening of New Zealand’s borders. However, the outlook for the local economy looks challenging.
While the economy has performed well (despite recent lockdowns), rising prices and labour market pressures have prompted the Reserve Bank of New Zealand (RBNZ) to raise interest rates. We expect this to continue into 2022 and should help to cool the economy.
But, from an investment perspective and despite the relatively muted outlook for domestic equities and bonds on the back of rising interest rates, there remain a number of quality companies which will continue to adapt and thrive in this ever-changing environment.