Us inflation continues to hit a 40-year high. The US Consumer price index (CPI) rose 0.6 percent month-on-month in January and 7.5 percent year on year, the largest year-on-year increase since February 1982, according to the latest data released by the US Labor Department on February 10, 1982. The high inflation figures added to fears that the Federal Reserve would soon embark on aggressive monetary tightening. Federal Reserve Chairman Colin Powell also revealed recently that the Federal Reserve may raise interest rates several times this year to fight inflation, and the earliest rate hike may be in March.
Mark Haefele, global chief investment officer of UBS Wealth Management, said in an exclusive interview with "Global Financial Wire" that the Federal Reserve is expected to start raising interest rates in March and may raise them three times this year, but the market is also considering the possibility of four rate hikes.
Haefele also noted that stubbornly high inflation is probably the biggest risk to the economy and markets, and that tighter monetary policy and the first year of tightening will not be enough to stop the stock market rally or interrupt global growth momentum.
Haefele expects global GDP to grow by 4.7% year-on-year in 2022. He also believes the focus for emerging markets in 2022 will be the recovery of Chinese stocks.
Most of the world's central banks will tighten monetary policy in 2022. How will relatively tight monetary policy affect markets?
Mark Haefele: The effect of tighter monetary policy is that it removes some of the stimulus. When it comes to market impact, the first thing to do is look at history. When central banks start to tighten monetary policy, equities can still do well, judging by the s&p 500. Because policymakers' logic is that growth is strong, they can tighten monetary policy. Historically, in the first six months after policy makers start tightening, the S&P 500 has typically risen about 5% in the following five months.
But the pace at which inflation falls this year will determine when policymakers exit tightening or have to raise rates. The current base case is that tighter monetary policy and the first year of tightening will not be enough to stop the stock market rally or interrupt the momentum of national or global growth.
When do you think the Fed will start raising rates? How many rate hikes will there be this year?
Mark Haefele: We think the Fed will probably start raising rates in March, maybe three times this year, which is what the market is expecting. I think if our argument that inflation is starting to slow is confirmed, it could be positive for equities, which are geared up for higher interest rates.
The People's Bank of China has already started cutting reserve requirements. How would you comment on that?
Mark Haefele: We are very excited to see this move. Many people are envious of the way China manages its economy, dealing with different issues very pragmatically. For example, COVID-19 and other uncontrollable factors. At the same time, I think China has responded positively to the corporate debt problem and tried to steer the economy in a better direction. In the first half of this year, we expect western developed equity markets to do better, because that's where the growth is. But that leadership is likely to shift gradually and, later this year, more towards the Chinese market.
How will the current divergence in US and Chinese monetary policy affect global equity markets?
Mark Haefele: To use a common expression, for example, someone with their hand in an ice bucket will experience a different temperature than someone with their hand in a fire. I think this is not a bad thing if these policies are introduced based on the right judgment. In the West, where growth had reached strong highs, stimulus measures began to wane. And if China adds stimulus, it could indeed help Asia recover more quickly than expected, given moderate headline inflation throughout the year. So I think it's important to look at the total amount of global stimulus, to think about the world economy from China, the US and Europe, to look at what's happening with inflation, what's happening with COVID-19.
You can see that this balancing act has worked well so far, except for this spike in inflation. How this balance continues to move forward will be one of the priorities of this year's economic work.
Inflation may gradually normalize
What key words would you use to describe the economy in 2021? Why is that?
Mark Haefele: Last year was a year when the economy was resilient enough and the market was unbalanced. The global coronavirus pandemic, and the measures governments have taken to respond to it, have made economies more resilient. At the same time, government intervention leads to uneven economic performance -- for example, as the government shifts its focus to different areas, such as technology or health care.
Inflation will rise sharply in 2021. What will happen if inflation stays high for a long time?
Mark Haefele: Stubbornly high inflation is probably the biggest risk to the economy and markets. At present, I think the main concern in the market is that high inflation will not be brought under control even with the expected policy adjustment. Restarting the economy will require a stronger response from policymakers.
Typically, the economy recovers, central banks start raising rates and then fall into recession. That's something we have to worry about. If inflation remains high, that is what has happened many times in the past.
You mentioned that this year will be divided into two phases. Can you elaborate on that?
Mark Haefele: If you think about trends in growth and inflation, we expect the economy to grow well above normal in the first half of 2022 as excess household savings are consumed when the economy restarts and businesses replenish inventories for reopening; Inflation will also remain high for most of the first half.
But going into the second half, we expect some of the excess household savings and economic stimulus measures to continue to kick in and normalize growth. As people spend less on shopping, inflation will start to fall. Excessive consumption will lead to shortages of materials and goods. As the epidemic abates, people will shift their spending to services such as restaurants and travel, which could normalize inflation in the overall economy.
What about supply chain issues?
Mark Haefele: I think it's part of the conversation about normalizing inflation. If you look at the last two years, we are stuck at the port.
That creates supply chain problems, which are the real cause of inflation. So as we ease supply chain problems we also ease inflation. We may not go back to the highly globalised stage of a few years ago, where many companies are trying to localise their supply chains. It will increase expenses, it will increase capital expenditure, but it will also increase economic growth. When these things reach a new equilibrium, they may also fuel inflation.
You expect global GDP to grow by 4.7% yoy in 2022. What factors will drive GDP growth?
Mark Haefele: As I mentioned, there will be halves this year. The focus of consumption is now on buying goods, and we expect it to shift to buying services. As the blockade is lifted, buying services could be a strong driver of growth in the second half of the year.
While stimulus is being tightened, the pace of fiscal and monetary tightening is likely to be relatively moderate if inflation starts to fall. That gives the economy plenty of time to keep growing.
What are the downside risks to the economy this year?
Mark Haefele: There's always a risk. Inflation leads to an unfamiliar situation that leaves policymakers open to error. And with bond yields already at historic lows, it is easy to make mistakes. Government bonds are now trading at negative, near-zero and zero interest rates across much of the world. This means that the role of bonds in portfolios, or the ability of policymakers to use them to set interest rate policy, is clearly different than in the past.
Policy mistakes may therefore be the biggest risk. Other factors, of course, include a renewed rise in new infections due to the Novel coronavirus variant. Finally, we also need to watch the geopolitical situation.
China's stock market recovery will be the bright spot for emerging markets in 2022
What is your forecast of 10% global earnings growth in 2021 based on?
Mark Haefele: In 2021 we see a massive increase in GDP driving higher earnings. But as you know, we can still feel the strong level of global earnings growth from 4.7% GDP growth. What needs to be noted is the situation of COVID-19. Now, the overall number of coronavirus infections, including the daily number of new confirmed cases, has begun to decline, even in the United States and parts of Europe. This allowed some of them to reopen; Companies whose earnings were severely reduced due to the impact of the epidemic began to recover and their earnings improved.
Which industries do you think will have more opportunities?
Mark Haefele: At the beginning of the year, we're focusing on deals that are reopening. That brings attention to countries such as Europe and Japan. As I've said before, focus on cyclical stocks, financials and energy. At the same time, we are also starting to see healthcare as a more defensive sector as we are likely to be more deeply affected by policy tightening. With more elective surgery and the possibility of a resurgence, the health care industry is defensive both on the part of big Pharma and on the part of surgery. In addition, the healthcare industry has some growth potential because it includes elements of biotechnology. Healthcare is cheaper in the overall deal than technology.
How do you forecast The Chinese stock market in 2022?
Mark Haefele: We think last year was a tough year for the market. I am trying to understand the reform and policy steps that China is implementing, when will the policy end? We are now closely watching these stimulus and easing measures in China, which will help the Chinese market to take the lead, especially in the second half. I am optimistic that China's economy will do better this year.
What about emerging markets?
Mark Haefele: Our emerging market focus will shift to Asia later this year as the Asian economy is led by China. I think now is the time, in terms of commodity countries and commodity emerging markets, to look for places that can profit from strong commodity movements. But first, the story of emerging markets in 2022 will be about the recovery of Chinese equities.
What advice do you have for investors?
Mark Haefele: The most important thing is to look at the overall portfolio and how you allocate your money. We need to think about how much capital we need over the next few years, and liquidity issues. What parts of your portfolio can you hold for the long term? What is money that I don't need right away and can use for long-term investment growth? For those of you who are very lucky [in the investment markets], think about what you need to leave behind. What money you won't need in your lifetime that can be invested for the truly long term; And what assets can be left to the public, public, charitable and related organizations.
Strategically, I think it's going to be an interesting year. You know, we can't get too attached to the headlines we're talking about. In the US, at least, people are using social media to "binge" and get caught up in the headlines. So focusing on the headlines of the day is not a good strategy. Paying more attention to things like the interconnectedness of growth and policy, and judging what is likely to happen in markets from that, rather than just relying on sensational headlines, can make you a better forecaster.
So people need to focus on the longer term. That's what we're trying to help people manage their investment markets and their finances.