Economic Outlook
Moderating growth momentum
The global economy staged a spectacular recovery in 2021, helped by a pandemic-induced low base the year before. However, different countries are at different stages of recovery (Figure M1). As the low-base effect wears off, global economic growth is likely to moderate in 2022 before stabilising. Despite the slower rate of expansion, the recovery will be more resilient as a result of a broader-based sectoral growth in the global economic reopening.
Figure M1. Different regions are at different stages of economic recovery.
Source: UOB Global Economics and Markets Research, UOB PFS Investment Strategists (December 2021).
Differentiated growth
Asia ex-Japan is expected to be the fastest-growing region in 2022, powered by China and India (Figure M2). Given China’s more measured pace of expansion, Beijing could ease up on regulatory tightening to preserve growth. Elsewhere, Europe leads the growth charge amongst advanced economies. However, the risks of policy missteps remain — Political infighting in the United States (US) could affect infrastructure spending while overly-aggressive China reforms could trigger a slowdown and undermine social stability.
Figure M2. Global economic growth is expected to slow in 2022 after a spectacular 2021 recovery.
Source: UOB Global Economics and Markets Research (December 2021), IMF World Economic Outlook (October 2021).
Support from twin growth pillars
Heavy fiscal spending and strong consumption will boost global economic growth. The impact from fiscal stimulus roll-outs by the US, Europe, China and Japan will trickle down to the economy from the second half of 2022. Pent-up savings will fuel consumption and swing demand from goods to services as reopening gains momentum (Figure M3). This could buy some time to ease the supply chain backlog for goods.
Figure M3. Accumulated savings in the US remain high (left), while goods consumption has begun to switch towards services as the country reopens (right).
Source: MRB Partners (October 2021).
Reopening is critical
More economies are expected to reopen in 2022 amid rising vaccination rates and a shift towards a “living with COVID” strategy. Forging ahead with reopening is a test of political resolve and countries which are more connected with the global economy will want to seize opportunities as trade recovers. The emergence of the Omicron variant may slow the pace of reopening, but many countries are choosing to curb its effects using vaccinations and booster shots instead of lockdowns. Supply chain bottlenecks should ease towards the second half of 2022 as trade links are restored (Figure M4).
Figure M4. Freight costs are starting to ease as trade links are restored, which should partially ease supply chain bottlenecks.
Source: Bloomberg (30 November 2021). The Composite World Container Index reports spot container freight rates for 8 major East West trade routes. The Baltic Dry Index is a price benchmark for transporting major raw materials (including coal and iron ore) by sea.
Interest Rates and Bond Yields
Inflation to ease
The risk of persistent inflation remains in the backdrop given rising energy prices, strong wage gains and a global shortage of semiconductors. Supply chain bottlenecks should ease towards the second half of 2022, relieving inflationary pressures and allowing the effects of fiscal stimulus injections to trickle down to the economy without stoking inflation.
Central bank tapering in store
Led by the US Federal Reserve (Fed), most central banks have clearly signalled that they have begun or will begin tapering measures in 2022. The advanced warnings are meant to avoid a repeat of the Fed’s 2013 “taper tantrum”, which can upset market sentiment. The scale-back of pandemic-era stimulus will lead to reduced asset purchases but positive economic growth momentum will make up for the reduction in liquidity.
Figure M5. The Fed is expected to taper till March 2022 before raising rates in June 2022.
Source: UOB Global Economics and Markets Research (December 2021).
Yield curve to shift upwards
The gradual withdrawal of monetary support from central banks will lead to a rise in interest rates, nudging both short-term and longer-term yields higher in 2022, with three 0.25% rate hikes on the short end and the 10-Year US Treasury yield expected to touch 2.15% by end-2022. Investors need to watch out for risks of over-tightening, which could cause a spike in yields.
Prefer high-quality bonds
Within the fixed income segment, being selective is key. We prefer high-quality corporate bonds from Financial and Industrial issuers with coupons above 3%, Asian Investment Grade (IG) bonds for their shorter duration and higher margin of safety, as well as sustainability-linked bonds due to their high demand. These bonds will be more resilient in a rising interest-rate environment.
Currencies and Commodities
USD to rise
The Fed’s normalisation policy and expectations of US rate hikes in 2022 will drive further gains in the US dollar (USD). This will come at the expense of Asian currencies which are broadly expected to weaken relatively. Other major currencies such as the Canadian dollar (CAD) and New Zealand dollar (NZD) could outperform the USD as their central banks are expected to dial back on monetary stimulus and raise rates.
Neutral on gold and oil prices.
The Fed’s tapering strategy is a negative development for gold prices. Higher yields and a stronger USD will dim the lustre of gold as a hedge against inflation. Strong demand for energy and the OPEC’s restraint on supply could worsen the global energy shortage, but crude oil demand may be reduced if the Omicron variant slows the global recovery.
Corporate Earnings and Equities
Positive but slowing earnings momentum
Corporate earnings will remain positive but register a more modest pace of growth, as the global economic recovery slows down. Stronger European and Asian economies will underpin corporate profits in their respective markets, while lower price-earnings multiples give their equity markets more upside potential than US equities.
Figure M6. European and Japanese corporate earnings are expected to remain positive, with cheaper valuations than the US.
Source: Bloomberg (30 November 2021).
Earnings sustainability is key
In 2022, strong earnings surprises will take a backseat in driving market performance. Higher borrowing costs could impede access to capital. Rather than relying on cheap financing to drive growth, the focus will shift to earnings sustainability and return on equity (RoE). A resilient business model backed by strong management holds the key to a sustained profitable growth and provides a better indicator for long-term returns.
Reopening favours equities
European equities will benefit most from global reopening and strong earnings growth. Asia ex-Japan equities should gain from high vaccination rates and Beijing’s slower pace of regulatory tightening. Be more selective on US equities – go for value-cyclical sectors such as financials and consumer discretionary in the first half of 2022 but switch to high-quality growth equities in the second half of 2022 as growth moderates.
Figure M7. Key Drivers and Risks for 2022
Figure M8. Summary of Asset Class Views
Further economic reopening in 2022 will drive the recovery in global corporate earnings, but interest rates will trend higher as central banks tighten monetary policy. Therefore, we recommend a higher allocation to equities and less to fixed income in a diversified portfolio in 2022. Investors can do this by considering more growth-oriented Core solutions as well as leveraging on long-term Megatrends for tactical positioning.
Figure M9. Three Key Takeaways for 2022
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