Having thought that the end of the crisis was potentially in sight, evidently the latest outbreak of the Omicron variant of Covid-19 is a setback and has created further uncertainty. The path to recovery will undoubtedly still be bumpy over the coming year as governments grapple to control this latest outbreak, particularly as seasonal factors make this more difficult through the winter months. So far nobody knows whether the mutations in the Omicron variant will significantly reduce the effectiveness of existing vaccines and this is clearly the key issue to monitor over the coming months. Even in the worst case scenario, that vaccine efficacy is significantly reduced, drug companies seem confident that they can produce new vaccines within about three months. New anti-viral pills could still also help to reduce hospitalisations.
We therefore feel it is unlikely that, even in the worst case scenario, financial markets would experience the same degree of declines that were seen at the start of the pandemic when nobody knew whether vaccines would ever be available. Our base case therefore remains that we continue to expect positive growth across the western developed world and for inflation to remain above central banks’ targets during 2022. Whilst monetary policy should marginally become less favourable in 2022, we do believe that the normalisation process will be gradual and that fiscal policies will remain accommodative. Furthermore, better than expected earnings growth with supply shocks easing, the China/EM backdrop improving and normalising consumer spending habits, should provide some support for investors.
There are of course risks to this outlook, particularly the resurgence of Covid-19 and the potential effect of the new variant if, in the worst case scenario, it is shown to evade the existing vaccines. Furthermore, inflation will of course remain a recurring theme. A further delay in China reopening, additional supply chain issues and labour shortages could well place further pressure on inflation and for central banks to increase interest rates.
There is little doubt that market conditions will remain challenging and investors should expect further volatility going forward, however, stimulus from Central Banks and governments should hopefully continue to provide some support for investors.)
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