Brewin Dolphin's chief strategist is expecting markets to move to a "less positive environment" for equities, with the Omicron variant of Covid-19 a "potential banana skin".
Speaking to FTAdviser, Guy Foster said Brewin was expecting to remain invested in equities despite its forecast of a deceleration in growth, saying these were still benevolent conditions for doing so.
He said: "The potential banana skin for equity markets is the Omicron variant. Obviously, there is more we don’t know than we do know about Omicron. The speculation however is that it is very likely more transmissible, and very likely able to significantly evade covid immunity through vaccine or prior infection.
“That is clearly bad news. However, Covid does not have the same overall risk factor associated with it because we now know that a solution will come, before we might have strongly believed that but now, we know the technology exists.
“We also know the lead time for reformulated vaccinations to be effectively mass produced is long, but much shorter than that faced by the original development, approval and production schedule.”
Foster said he expected inflation to remain in focus for the first half of 2022 at least.
“As the base effects from last year wash out, supply chains gradually unclog, and if the current weakness in oil prices persists, then inflationary pressure can ease,” he said.
“Should inflationary pressures persist then central banks would need to step up their inflation fighting activity (such as higher interest rates and lower asset purchases) which would be unfavourable for markets.”
Foster said Brewin Dolphin's focus would be on the economic cycle, with the economy having suffered its steepest recession and its sharpest recovery in modern history.
“The market has reflected that with one of the most intense bull markets on record,” he said. “These phases of the economic cycle have been short and sharp. The question is whether having recovered from such a shock, the cycle can slow down to a more relaxing cruising speed.
“Economic and profit growth will necessarily slow from the breakneck pace of 2021. Historically, each economic cycle would normally be punctuated by a series of mini cycles in which growth accelerates and decelerates without falling into recession. We expect one of these decelerations during 2022.
Foster added: “We have been in a very supportive phase of the business cycle in which there has been a huge increase in consumption facilitated by consumers who have money to spend, and retailers and service providers who have been progressively more able to serve them.”
Foster said as the supply side of the economy had opened up, it has not been able to keep up with demand which had caused the return of inflation.
He explained the imbalance between supply and demand in 2021 “constituted something of a perfect storm”.
Foster said the global economy experienced a generally increased level of demand in 2021 and while there were changes in the types of demand, the rationale for the increased overall level of demand was fiscal stimulus.
“A stark contrast in the approaches to Covid in the US and Europe initially saw European’s attempting to keep people in their existing jobs, compared to the US, which paid enhanced benefits to those who had lost their jobs, even temporarily,” he said.
“These enhanced benefits were, at times, even more generous than the pay some former employees had lost – naturally that increases demand. To compound this, the US also issued direct payments to individuals in April 2020 and then again in March 2021.”
Foster explained that these fiscal transfers can be successful in boosting demand as they put money in the hands of households who are most likely to spend it, which he said proved to be the case.
“A similar factor came from Covid and lockdown itself,” he said. “This meant many workers were able to work from home, reducing their travel expenses. While that did not reduce demand overall, it did change the type of things which people were spending money on.
“Having lower travel expenses freed up disposable income which could be spent on more indulgent items.”
sonia.rach@ft.com
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