What does 2022 hold in store for markets?
Investment managers and analysts must take account of a range of potential threats and opportunities facing global markets in 2022. Here the Walter Scott Research Team looks at the challenges future earnings growth and interest rate movements may pose in 2022.
“From the obvious risk of a resurgence of Covid-19, supply chain disruption and the related issue of inflation remain market concerns which may linger into 2022. However, we believe that the current supply issues will ultimately be resolved, while quality businesses should be more than capable of weathering a period of even moderately severe inflation thanks to pricing power and productivity gains.
Our high-level concerns for 2022 relate to threats to earnings growth, given the ongoing challenges, and the prospect of higher interest rates. Since the beginning of this century, interest rates have been on a downward trend across much if not all of the developed world. This has provided an excellent tailwind for all asset classes apart from cash. Given the rebound in economies, stretched central bank balance sheets, and the potential for inflation to remain elevated even with the expected improvement in supply chain disruption, there is a possibility of meaningful interest rate increases in several major economies. This perhaps raises the spectre of earnings multiple contraction.
Against this backdrop, we believe investors should be baking in a normalisation in valuations and asking probing questions about whether the companies they are investing in have the ability to offset this with significant and sustained earnings growth.”
As at 11 September 2021.
The Walter Scott Research Team
771859 Exp: 23 May 2022