2022 caution signs include inflation, China and stubborn Covid

Lingering Covid concerns could disrupt business well into 2022, says Michael Arno, an associate portfolio manager and senior research analyst with Brandywine Global Investment Management.

Arno said that while the omicron variant has proven less severe than delta, its quick spread poses an ongoing threat to global manufacturing and logistics, especially given China’s zero-tolerance policy to Covid exposure.

“If we see a wave of cases followed by closures at plants and ports, we’re going to continue seeing supply chain issues,” he said.

Covid-related hardships have also pushed millions of people around the world further into poverty, Arno said, creating new market risks with a swing to the political left in some emerging countries, particularly in Latin America.

Chile is going through a constitutional rewrite following the election of its new left-leaning president Gabriel Boric, and social spending is expected to increase. In Brazil, leftist former president Luiz Inácio Lula da Silva has a dominant lead in the current election campaign. And in Colombia, the former left-wing mayor of Bogota, Gustavo Petro, has emerged as the front-runner in polls for the May 2022 national election.

“So [there’s] definitely some pressure on spending and a shift to the left in a number of places around the world,” Arno said.

Arno discussed market risks on the latest episode of the Soundbites podcast, sharing the microphone with Jennifer O’Hara Martin, portfolio specialist with T. Rowe Price.

Martin agreed that vaccine effectiveness and government responses to Covid concerns will continue to shape the investing landscape through 2022.

“The global pandemic has created near-term distortions in the market, but this has also created opportunities for long-term investors to invest in high-quality companies that are trading at a discount,” Martin said.

She described Covid as a high-impact event that has driven environmental, social and governance initiatives by demonstrating how intertwined economic outcomes are with the prosperity of the planet.

“Companies that understand these connections are often the innovators that are positioning themselves for real and future growth,” she said. “We believe this is a very good disruption that we seek to be on the right side of.”

In addition to Covid-related challenges, Arno and Martin said uncertainty about China’s fiscal policy will undoubtedly affect markets in 2022.

“We saw a credit impulse drag for ’21. That has knock-on effects for countries around the world,” Arno said. “Seeing their change in policy in ’22 could offset some of the tightening that we’re seeing in developed markets from the central banks; however, it depends on the degree of fiscal stimulus they take.”

Martin described the evolving relationship between the U.S. and China as a struggle between two superpowers that is creating complex dynamics for multinational corporations.

“It’s become very clear that underlying tensions between these two nations are real, structural and unlikely to be resolved with ease,” she said. “So, this is an area that we continue to monitor for both risk and opportunities.”

Martin maintained, however, that market uncertainty is neither new nor particularly worrisome.

“As we approach 2022, we must maintain a healthy level of caution while also really keeping our eyes open to the opportunities that present themselves,” she said. “As global investors we remain prudent, and we must maintain some balance and stay true to the framework while also acknowledging and being aware of our blind spots.”

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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.

For more on the year ahead, check out this 2022 Market Outlook.

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