KUALA LUMPUR: The surprises over the last 12 months should give some indication of the significant uncertainty facing investors in 2022, said Clearbridge Investments managing director of portfolio manager Nick Langley.
Forecasts for global gross domestic product (GDP) growth and inflation had a high chance of coming in well above or below consensus, Langley added.
"Market expectations for 2022 have moved significantly in recent months, on the whole pointing to a hotter than expected economy. Broadly, markets expect gently slowing inflation and growth over the 2021–2023 period . The question will be how much and when," he said in a report.
Langley said with supply chain issues, higher housing costs, higher commodity prices and producer price inflation remaining square in the sights for 2022, higher inflation was a risk for global markets.
He expects growth to slow to trend or below by mid-2022 and US Treasury yields to rise, which would mean a continuation of negative real bond yields.
"Additional forecast volatility and therefore market uncertainty will arise as new Covid-19 variants appear and circulate. However, with high levels of vaccination across the developed world and less propensity for mobility restrictions and lockdowns, we expect the economic implications to be limited."
Overall, Langley said markets would find support given excess liquidity, but should be subject to corrections as growth and inflation expectations are recalibrated.
He expects markets to be broadly in a mid-cycle phase, where earnings growth is required to support multiples and returns moderate from the relatively high levels of the last three years.
"Consumer price inflation is running in the mid-single digits and is likely to continue to well in 2022. Meanwhile, producer price inflation is running in the low double digits and is also likely to continue to well in 2022.
"This sets up an interesting conundrum: companies will have the option to pass on the increased input prices (producer price inflation) to finished goods."
This should ramp up inflation and rates expectations as well as bond yields, leading the cost of capital to increase and earnings multiples (and therefore stock prices) to decrease, he added.
Elaborating on inflation and infrastructure assets, Langley said generally, user-pays infrastructure and utility returns were positively correlated to inflation, but results differed by sector and region.
Some sectors have a direct link to inflation: utilities in the UK, parts of Europe and Australasia have returns and often asset bases indexed to inflation annually.
He said toll roads had earnings rates indexed to inflation on a quarterly or annual basis.
Airports will often have inflation-indexed retail leases and regulatory regimes for aeronautical activities.
Sectors with indirect links to inflation include utilities regulated on a nominal basis, as in North America and parts of Europe, where the utility commissions generally provide an allowed return based on a nominal return on equity invested in their asset bases.
