In his regular column, Jeff Lewis director at RobMac gives his excellent summary overview of the US & UK economies and investment markets. This is his last one of 2021.
The World Health Organisation has moved Omicron straight to Variant of Concern status, skipping the intermediate Variant of Interest step. Governments have also moved swiftly too, especially in the UK, where the PM was criticised for reacting too slowly to the first wave, and in Japan, which has effectively banned foreign visitors. That owes much to the northern hemisphere winter, which creates greater pressure on hospitals and raises transmission, plus the need to ‘save Christmas’.
Longer term, we can be reasonably confident that the world will deal with this new variant. Vaccine efficacy may be reduced but the starting levels are so high that it is likely that they will remain powerful. And they can be tweaked in few months to restore efficacy if necessary. Treatments for those that fall ill have improved enormously so that fewer new cases end up in hospital and stay for shorter periods. New cases are no longer the key variable for monitoring the economic impact of the pandemic.
Last week, global GDP was within 2% of its pre-Covid level, compared with a peak of 20% in April 2020, according to estimates by Goldman Sachs. We hope that the global economy will shrug off the new variant and that risk assets will recover and rise to new highs.
This suggests that we have a buying opportunity but beware, the selloff has been modest and volatility will surely remain high for a while however we are positive about future growth and investment market returns.
One thing that has definitely changed is the prospect for monetary tightening in the near term. Last week markets were pricing in a modest Bank of England base rate rise at their next meeting on 16 December but we’d be surprised if that happened. Base rates are still set to rise in the UK in 2022, a market pricing of 1% plus for base rates by the end of 2022 seems reasonable. In many ways this is a good news story as it would indicate that we are heading back to a more balanced approach to monetary and fiscal policy after over 12 years of quite stark tightening and then loosening . In the US its likely we’ll see interest rates rise a little later than planned to give them some wiggle room however the new normal will be considerably
lower than we have experienced in the pas….anyone remember 15 % rates !?
All in all, we think we will still get the Santa Claus rally that has been forecast by quite a few fund managers in the last week.
May we wish all our clients an enjoyable festive break and a Happy New Year & here’s hoping for positive returns in 2022.
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