For 2022 as a whole, we expect growth levels above the long-term potential for the US as well as for Europe and China. The driving forces remain normalisation after the recession in 2020, accommodative monetary policy (and fiscal policy in Euroland) and a less tight policy in China. However, this positive outlook will be marred by Omicron in the short term.
Bo Bejstrup Christensen
Chief Portfolio Manager, Head of Macro & TAA, Danske Bank Asset Management.
Because of Omicron, we expect modest growth in Euroland and the US in Q1, which constitutes a significant slowdown from the strong growth at the end of 2021. However, there is a light at the end of the tunnel – and potentially a very strong one. Just as in the past two years, the end of winter will likely reduce infection rates again. That should trigger a powerful acceleration in growth as we head for the summer – similar to 2021.
Even more critical is whether Omicron marks the beginning of the end of the pandemic – i.e., will Omicron prove so mild that it more resembles a normal flu. Naturally, that would be very positive for the global economy, and we are certainly not ruling out the possibility at the moment.
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EQUITIES: We expect a positive return of around 5%
Turning to financial markets, uncertainty is high in the very short term, as there are still many things we and others have yet to learn about Omicron. If our assumptions pan out, the market will have to adjust growth expectations for the near future, which may produce modest and short-lived falls in equity markets.
However, we would reiterate that the weakness in growth should be temporary and replaced by further strong growth as we head into spring and summer. While monetary policy in the US, in particular, is taking nascent steps towards normalisation, policy will remain accommodative and not in itself constitute a threat to the equity market. We therefore expect a modest positive return on equities going forward to the summer and also a positive return for 2022 as a whole.
We expect a return from US equities of around 5% for 2022 as a whole and a bit above 5% from European equities. The biggest joker in the pack is emerging markets. Given their very disappointing return in 2021, emerging market equity valuations are now considerably less expensive than in the spring. Nonetheless, they are still around 5% too expensive, in our view. However, if our global and especially our Chinese forecasts prove correct, emerging market equities could deliver a positive return of around 5%.
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BONDS: We expect yields to rise
Looking at the bond market, our view is that long- and medium-term government yields in both Germany and the US are set to increase in the coming 12 months. More specifically, we expect US 10Y Treasury yields will rise to just shy of 2%, while German yields will rise to around 0%.
In the US, especially rate hikes from the Federal Reserve will tend to push the short end of the yield curve considerably higher. While Omicron may provide some upsets in the very short term, the Federal Reserve appears keen to end bond purchases as quickly as possible. We expect this to happen in mid-March, which opens the door to rate hikes as early as the March meeting. Although we expect inflation to ease from its current historical highs, it will likely remain above 2% throughout 2022. Given declining unemployment, we therefore expect the Fed to hike interest rates three times in 2022 and a further 3-4 times in 2023.
This is in stark contrast to our forecast for the ECB. While the ECB is also set to scale back bond purchases, they will nevertheless carry on at a modest level. The ECB’s total holding of bonds will therefore continue to increase in both 2022 and 2023, with rate hikes on the cards for end-2023, start-2024 at the earliest, in our view. Hence, the divergence in monetary policy between the two regions will be considerable.
This material has been prepared for information purposes only and does not constitute investment advice. Note that historical return and forecasts on future developments are not a reliable indicator of future return, which may be negative. Always consult with professional advisors on legal, tax, financial and other matters that may be relevant to assessing the suitability and appropriateness of an investment.