Inflation will lead to a rise in interest rates in 2022: The Continental Group survey

The Continental Group, a leading insurance intermediary and financial services provider in the GCC region, hosted a webinar titled ‘Beyond the Bounce Back’, which saw experts weigh economic risks and opportunities in 2022 within the pandemic context. The audience surveys offered a glimpse into investor sentiments as the year draws to a close.

Jens Waechter, Senior Global Macro and Research Analyst at Franklin Templeton; Fares Benouari, Senior Portfolio Manager of Swiss and Global Equities at UBP; and Neelam Verma, Vice President and Head of Investments at the Continental Group, were the key speakers, and the webinar was moderated by Abhishek Datta, Associate Vice President at the Continental Group.

The global financial markets have remained largely resilient in 2021 in the face of continued pandemic impact, defying early projections. Although economic recovery remains uneven due to new virus strains, disparities in vaccine rollouts between nations and distinctive market forces, the growth outlook for 2022 is expected to be positive, characterized by effective fiscal management, increased digitalization, and risk mitigation.

The panelists mentioned the key drivers for this year’s market performance were a strong rebound in growth, earnings upgrades, increased productivity gains and continued support from governments and central banks globally. Headwinds for the year ahead are seen to be less fiscal spending, tighter monetary policy and inflation.

The experts touched on inflation having an impact on both equity and fixed income portfolios. UBP’s economists’ see inflation peaking early next year in developed economies and later in the year for developing economies, stabilising by H2 2022.

In a poll conducted during the webinar, a resounding 74 per cent of respondents said they expect inflation to increase in 2022.

“The current inflation is driven by both demand and supply. Disposable income has increased during the pandemic, as people couldn’t spend. Following the reopening, however, spending has increased, but supply chains are unable to meet the high demand. So, prices are rising, especially in service sectors that have been disrupted the hardest by the pandemic. With deflationary policies expected soon, the situation could improve by the second half of 2022,” said Jens Waechter.

Next year, higher levels of inflation as well as monetary tightening could have a pronounced impact on both equity and fixed income markets. However, a gentle rise in rates will not elicit a dramatic response, especially in equity markets. The fixed income securities could be off to a sluggish start.

“The economic outlook is subject to multiple variables, including new strains, spells, and administrative responses. But there are structural tailwinds to factor in too. Businesses have made productivity gains, pivoting to digital operations, increasing efficiencies, and reducing costs. There is an emphasis on value creation, and businesses that can generate good revenues and accurately measure cash flows will stand out. Also, 2022 will see greater exposure to ESG, automation, and fintech as part of polythematic investment strategies,” said Fares Benouari.

Consistent with Fares’ belief are emerging markets like India, which have excelled in value creation and registered considerable growth in 2021. Nordic markets and the United States, too, have posted promising numbers in the run-up to 2022. The majority of respondents in the Continental Group’s survey said they expect the US market to perform well next year.

“The Continental Group is bullish over the economic outlook of 2022. We expect a rebound to pre-pandemic levels, encouraged by upbeat investor sentiment and increasing awareness of portfolio rebalancing and growth opportunities in bonds and equities. Buoyed by effective pandemic management and the resumption of economic activity across sectors, the year 2022 offers much in the way of optimism,” said Neelam Verma.