Investment Newsletter – February 2022
The IMF sees the omicron variant weighing on growth in the first quarter of 2022, it expects the negative impact to fade starting in the second quarter, assuming that the global surge in infections abates and the virus doesn’t mutate into new variants that require more restrictions on mobility. Bringing the pandemic to an end depends on ending vaccine inequality. The fully vaccinated share of the population is about 70% for high- income countries but less than 4% for low-income nations. Eighty-six nations, accounting for 27% of the world’s population, fell short of the 40% vaccination level for the end of last year 2021, that the IMF estimates is needed to curb the pandemic. The world also suffers from deep inequality in Covid-19 testing, with testing rates about 80 times higher in high-income nations than low-income countries.
Moreover, the world economy expanded 5.9% in 2021, the IMF estimated, the most in four decades of detailed data. That followed a 3.1% contraction in 2020 that was the worst peacetime decline in broader figures since the Great Depression. Central banks that slashed interest rates to soften the economic decline caused by the pandemic face pressure to tighten policy to confront surging consumer prices, threatening to curtail the growth rebound. Governments also have less fiscal space for spending to address health needs and buoy their economies after piling up record debt. In fact, advanced economies raising interest rates may create risks for financial stability and emerging-market and developing economies’ capital flows, currencies and fiscal positions after debt levels increased.
Respondents to the GRPS rank “climate action failure” as the number one long-term threat to the world and the risk with potentially the most severe impacts over the next decade. Climate change is already manifesting rapidly in the form of droughts, fires, floods, resource scarcity and species loss, among other impacts. Meanwhile, short-term financial market pressures are hawkish central banks and inflation that will result in asset bubble burst.
As of 26 January 2022, the Federal Open Market Committee said it would keep the federal funds rate unchanged at historically low levels between 0% and 0.25%, but that it would be appropriate to raise the rate “soon” with inflation well above 2% and a strong labour market. The Fed also said it expects to end its pandemic-era bond-buying program by early March “in light of the progress the economy has made”. Furthermore, Powell confirmed Fed officials will decide whether to raise interest rates at their next meeting in March, adding that they are currently “of the mind” to do so, and that they haven’t decided on the timing and pace of shrinking the balance sheet. The yield curve between 2-year and 10-year notes flattened to less than 75 basis points, the smallest gap since 28 December 2022, which may indicate a recession or a sharp slowdown in growth. Nevertheless, the path of the economy continues to depend on the course of the virus. Progress on vaccinations and an easing of supply constraints are expected to support continued gains in economic activity and employment as well as a reduction in inflation. Risks to the economic outlook remain, including from new variants of the virus and recent result shows that the number of people in the United States filing claims for unemployment benefits rose sharply in the mid-January 2022.
US officials have said that Russia has shown no signs of de-escalation and they have warned that an invasion could be imminent as Moscow masses tens of thousands of troops on the Ukrainian border. However, as of 27 January 2022, Russian and Ukrainian negotiators agreed that a permanent ceasefire in eastern Ukraine must be observed “unconditionally” following hours-long talks in Paris. The announcement came after a meeting at the Elysee Palace of the so-called Normandy Format, a four-way conversation between representatives from Ukraine, Russia, Germany and France, that has been trying to broker peace in eastern Ukraine since 2014.
The global credit impulse is now in contraction territory, it is expected that growth will cool down significantly in the next six to nine months afterwards. That said, growth slowdown is expected starting from Q2 to Q3 onwards in 2022. On the other hand, after the tight monetary and fiscal policies implemented by China since early 2021, the recent dovish rhetoric from the PBoC suggests the central bank is embarking on a path of policy easing, which means that China’s credit impulse will start recovering later this year 2022.
As most of the severe risks on global scale in the long term is environmental risks, the transition to a net-zero economy will be crucial and hence metal-intensive. The required pace of transition means that the availability of certain raw materials will need to be scaled up within a relatively short time scale and, in certain cases, at volumes ten times or more than the current market size, in order to prevent shortages and keep new- technology costs competitive. Overall, metals and mining is a long lead-time, highly capital-intensive sector, price fly-ups and bottlenecks will be unavoidable as demand outstrips supply and price volatility creates uncertainty around the large up-front capital investments needed for production.
