Investors list “policy errors” as their top concern in 2022


Dear santa,

We have been fine all year (mostly), and what we really want at Christmas is to keep interest rates in the US as good and low as possible for as long as possible.

love,
investor

One of the main tasks of a market reporter is a gift to the world, which is through a lot of future prospect research by banks and investment companies, so you don’t have to. Some of this content is hundreds of pages long—it’s the product of dedicated and intensive work focused on the task of predicting in an inherently uncertain world (and trying to land in the customer’s inbox before the competition).

This is a rough summary of these often thought-out articles, but in any case, for the next 12 months or so, they mainly boil down to the letter to Santa Claus above. Everything depends on investors’ perceptions of inflationary pressures and how they think central banks in the hardest-hit areas, mainly the Federal Reserve, will respond.

In a sense, this is nothing new. Fed policy is very important, shocking news. But it’s worth noting that no matter what 2022 will bring us-new coronavirus variants, geopolitics, etc.-the primary discussion among fund managers remains the same as for most of this year: inflation. If policymakers respond to sudden increases in price pressures by any sensible measure, and the Fed tries to actively curb these pressures by raising interest rates quickly, then some risky assets will become vulnerable.

“Bond yields are completely dominant,” said Peter Rattle, head of equity at Royal London Asset Management. “It’s a bit simple. Maybe we missed a big event that is about to happen. But it is deeply rooted in investor psychology and we are used to low interest rates.”

“For stocks, this is the best time and the worst time,” Rattle continued. “This is the worst time because they have never been so expensive. But compared to buying U.S. Treasuries in a 4% inflation environment, they are a bargain. This is why the stock market refuses to fall. You need to be able to bring you Asset class with positive rate of return.”

Excluding the lowest yields on benchmark bonds, the conversation is completely different.

A recent survey of credit investors conducted by the Bank of America fully demonstrates this point. “Investors seem to think that only one risk is important: the central bank’s policy failure,” the bank said in its research summary. “Almost half of the interviewees said that this is their main concern and is close to the biggest reading ever. Investors believe that deep-rooted inflation will end the era of central bank predictability, and the upcoming interest rate hike will be faster than in the past. , Bigger and more chaotic.” The bank described this concern as a “policy panic.”

Omi Keron? any. According to the survey, 70% of investors in the study believe that this new variant of the pandemic has little economic impact due to low interest in lockdowns and the safety net of existing vaccines. Only 5% believe that the lingering Covid-19 is the top issue in 2022. On the contrary, it is entirely related to the outlook for interest rates.

Now, of course, the policy “wrong” of the Fed or any other central bank is in the eyes of bystanders. One might argue that failure to raise interest rates quickly to cope with price pressures is a mistake in itself, it will exacerbate inequality and may lead to a further sharp correction in the future. Some hedge funds will benefit from breakthroughs in the interest rate environment. Nevertheless, few people would object to the view that tightening monetary policy poses a challenge to fund managers.

For many experts in the banking, investment industry, and policy fields, the supremacy of monetary policy over asset prices is closely related to the punitive environment, because the performance of inflation is far from what most people predict. At the beginning of this year, when U.S. inflation exceeded expectations for the first time, fund managers were shocked, but were able to get rid of any urge to panic, pointing out that some professional projects such as second-hand cars were too effective. Since then, efforts to treat inflation as temporary have collided brutally with reality. Central banks have successfully maintained their patience and refused to rush to raise interest rates, but it is widely expected that 2022 will be the year of their collapse.The Bank of England has Raise interest rates, And the Fed has signaled Three ups next yearThe subject of questions and heated debate is whether this is an adequate or excessive response.

Salman Baig, a multi-asset investment manager at Unigestion in Geneva, is one of those who believes that inflation will calm down and the Fed will respond to negative shocks (such as the severe weakening of Omicron) by reducing its toughness.

“My view is that the Fed will back down,” he said. “At most, the Fed will raise interest rates once next year. If we think that the central bank will eventually become less aggressive, it is a boon. We must be humble. We may be wrong, and inflation may rise. But that is why we have risk control. .”

This is a simple wish list.

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