Investors have had a lot to endure in the first half of 2022, but it is not yet time to relax, according to Invesco’s chief global market strategist Kristina Hooper and global macro strategist Arnab Das.
The shift from a growth to a value market and from bull into bear territory on the back of rising inflation and hawkish monetary policies means there is more than one reason for concern when looking at what the second half of 2022 might bring.
Trying to put things into perspective, Hooper said greater attention should be paid to inflation, interest rates and the growth outlook.
Tackling higher prices first, this year to May, the UK consumer price index reached 9.1%, while the European counterpart, the harmonised index of consumer prices, rose to 8.8%. US data out this week revealed American inflation was up to 9.1%, a 40-year high and worse than had been feared.
But while many are convinced that domestic energy bills and food costs will continue to crimp household spending in the short term, in the longer term “inflation expectations remain relatively well-anchored”.
As these expectations are far tamer than the actual inflation levels, investors should remain vigilant and not be taken aback by future monetary policy decisions, the global market strategist warned.
In fact, further spikes in the interest rate are for Hooper a “fait accompli”, as “the credibility of central banks is on the line” and they need to prove their determination to keep inflation down.
This job could prove even more difficult, should fiscal policies interfere, said Das, particularly in the UK, where we are in the swing of the Conservative party leadership campaign with candidates promising tax cuts.
It is problematic for Das, as fiscal policy goes hand in hand with monetary policy and future interest rate levels. Tax cuts might end up being an ostensible benefit, as they could accelerate inflation and lead to greater likelihood of an intervention by the central bank. This is a scenario in which “you rob Peter to pay Peter”, as pointed out in a recent article on Trustnet.
The uncertainty around taxation, though, is not the only one brought about by the vacancy at Westminster since Boris Johnson’s resignation as leader of the conservative party.
While the resignation itself has had “a marginal impact on UK assets, we could see increased volatility the longer there is uncertainty surrounding future leadership”, said Hooper.
In the absence of precise indications, Das speculated what stance the next prime minister might take. On Europe, he hoped they would try to reconcile differences with the European Union in regard to the single market.
This would “help ease the pressures that a hard Brexit has imposed on the availability of labour and the willingness of foreign firms to keep investing in the UK”.
He added: “Now that the focus of political struggle has tilted from Brexiteer versus remainer to how to lower inflation and restore growth and living standards, there is some hope here – but nothing concrete yet.”
The next government will also have to try to claim a better position for the UK on the world stage, which Johnson was doing through Russia’s war in Ukraine.
According to Das, his attempt was “a diversionary tactic from his domestic troubles”, but his hard line is unlikely to recede with the future leader. However, “there is a risk that the UK’s mounting economic challenges will divert the next prime minister’s policy focus back home”.
The question ‘how will the UK redefine its economic policy framework after Brexit and in a global economy, which itself is facing major change, given Russia’s Ukraine war as well as geopolitical and geo-economic rivalry around the world?’ is a complicated one and “probably won’t be settled before the mid-2020s at the earliest”.
“Until then, the UK could be expected to continue to be an underperformer in its peer group of major developed markets,” said Das.