Advertisement
Central banks
Opinion
Nicholas Spiro
Nicholas Spiro

Macroscope | Three reasons for market optimism in 2022 despite economic risks

  • The global pandemic, rising inflation and hawkish stances by central banks linger in the air, but economic conditions and market sentiment can easily diverge
  • Investors learning to live with the virus, limited effects from the Fed’s tonal shift and policy easing from China should hearten investors in the new year

Reading Time:3 minutes
Why you can trust SCMP
Women shop for bread at a market in Ankara, Turkey, on December 20. Inflation in food prices and other areas remains a concern around the world as some of the leading central banks pivot to a more hawkish stance on interest rates. Photo: AFP
Nicholas Spiro

There is no shortage of risks and vulnerabilities for global investors to fret about as the second year of the Covid-19 pandemic draws to a close.

The sudden emergence and rapid spread of the Omicron variant has shaken confidence in the outlook for the global economy as governments reimpose restrictions and virologists warn about the severity and consequences of the highly infectious strain. Doubts over the efficacy of current vaccines against Omicron are adding to the uncertainty.
To make matters worse, the resurgence of the virus is fuelling concerns about the sharp rise in inflation. A more prolonged pandemic would cause further disruption to supply chains and exacerbate labour shortages, driving prices higher. Renewed lockdowns, on the other hand, threaten to undermine the recovery.
Advertisement
The third major risk, and the one investors are most worried about, is the hawkish shift from some of the leading central banks. The US Federal Reserve’s decision last week to speed up the tapering of its asset purchases and signal as many as three interest rate increases for 2022 has increased the threat of excessive policy tightening, a particular menace to emerging markets.

All these risks are amplified by the fact that global stock markets are priced for perfection. The value of global equities has doubled to US$120 trillion since March 2020, according to Bloomberg data. The forward price-to-earnings ratio – a popular valuation tool – of the benchmark S&P 500 index is not far below its level at the height of the dotcom bubble in the late 1990s.

However, if one thing has been abundantly clear since the virus struck, it is that economic conditions and market sentiment can diverge dramatically. Getting the big macroeconomic calls right has been much easier than predicting how markets will react to the most important economic and policy developments.

Advertisement
Select Voice
Choose your listening speed
Get through articles 2x faster
1.25x
250 WPM
Slow
Average
Fast
1.25x