Amid talk of inflationary pressures, the analysts at MFS Investment Management say inflation is likely to fall “a significant amount” in 2022 instead.
This year also looks to be a period of volatility, “probably more so than we witnessed in most of the non-recession years that we have witnessed over the last few business cycles”, says the team
“It’s the type of environment we expect to see in the rate markets, certainly in the risk markets, and in the equity markets. We’re generally underweighting our benchmark durations in a variety of portfolios, especially the front end and the belly of most global curves. From a fundamental point of view, whether it’s growth or inflation, we do think interest rates will move higher than today’s levels,” it adds.
The predictions are highlighted in the global investment manager’s macroeconomic outlook report, which covers what MFS’s investment teams are seeing in the global investment landscape, and their estimates moving into the new year.
Inflation
On inflation, analysts William J. Adams, Erik Weisman and Robert M. Almeida believe the inflation narrative has been “broader and longer term” than was expected around 12-18 months ago.
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“I think there are inflationary pressures that are widespread enough and persistent enough, such that we will see inflation that settles down at a higher level than what we experienced during the last business cycle,” says Weisman.
Inflationary pressures currently remain high in the US and most of the developed world. Inflation rates are also elevated in the emerging world, write the team of analysts at MFS.
“In order for inflation to continue at this pace, we will need to see bottlenecks get worse, energy prices double again and the price of goods rise dramatically,” adds the team.
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To this end, the analysts estimate that inflation is going to go a little higher than the market estimate of 2%.
Low odds of recession in 2022
As a result of fiscal stimulus along with a relatively higher level of total wealth, consumers now probably have a little more money in the bank, write the analysts.
In the short-term, the analysts are expecting to see the excess savings being “deployed” throughout 2022 and “create a glide path into a new steady state of potential growth that may be higher than the last business cycle”.
With that in mind, analyst Almeida sees the consumer sector remaining “really strong”, which puts the odds of seeing a recession in 2022 as low.
However, if consumers use their savings on higher prices for gas, food and other goods or services through the second half of 2022, then they might end up in weaker position than expected, adds the MFS team.
Valuation
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Within the report, the analysts suggest investors can expect to see lower returns over the next five to 10 years, compared to historical data derived over the “last several decades”.
“Interest rates are very low and equity valuations are historically high, which means that their yields are very low. Thus you can probably expect to see lower returns than history would suggest, which aligns with our long-term capital market expectations,” write the analysts.
“All financial assets derive their value off cash flows, and we believe that cash flows will not be as abundant as they have been. And those that have it should earn a scarcity premium or scarcity value,” they add.
China to grow more slowly over time
With emerging markets, the team estimates China’s growth to be slower over time, with growth figures standing at 2 to 4%, similar to that of a developed economy.
As it is, the team notes that this is already happening as China firmly establishes a middle-income level.
The environment in the 1H2022 “isn’t a great mix” for emerging markets as a whole in 2022, adds the team.
“Emerging markets don’t want higher rates from the Fed or a stronger US dollar, and they don’t want weakness in China. But these things are occurring now. We’ll see what happens with the dollar since it’s hard to know what is priced in, but the mix emerging markets really need is one in which the Fed is further along in raising rates,” writes the team.
“The other important factor in all of this has been the coronavirus, as emerging markets have generally been slow to vaccinate,” continues the team.
Photo: Chris Li on Unsplash
