This is Kristina Hooper, Chief Global Market Strategist at Invesco, and it is my privilege to introduce you to the mid-year 2022 outlook.
Now, let me start by explaining our objective in formulating an outlook. Our goal is twofold: to meet client requests for a macro outlook with asset class implications, while also honoring our commitment to the value of diversity of thought. This was an incredibly collaborative effort, pulling together thought leaders and investment professionals from all over Invesco.
We come together and collectively create a framework as opposed to a specific outlook. That’s because with a framework, we can provide a macro scenario that we believe is most likely but also offer two alternate scenarios that clients might anticipate– along with asset implications in the event either scenario were to come to fruition.
Much of the world continues to move past the COVID-19 pandemic, much but not all. Having said that , its remarkable effects on economies and policies remain top of mind as a new set of uncertainties enter the picture. Historic pandemic-era moves by both fiscal and monetary policymakers have already reawakened inflation after a multi-decade slumber in most economies. Then Russia’s invasion of Ukraine exacerbated these inflationary pressures, while also exerting downward pressure on economic growth through a surge in commodity, especially energy prices. Markets are contending with all of this just as some major central banks are tightening policy. Our outlook seeks to assess the balance of geopolitical risks against a backdrop of elevated global inflation and diverging monetary policy.
Our Base Case
We assume in our base case that hostilities continue at about their current level without any major escalation or de-escalation, that might cause an abrupt disruption to Russian energy supplies to Europe . In this scenario, in the US, we expect continued momentum from the post-Omicron reopening to help sustain growth despite the Fed’s focus on reaching a neutral policy rate as quickly as possible during 2022 in addition to shrinking its balance sheet. In contrast with major developed Western economies, China continues to be in a substantially different cyclical position largely driven by continuing challenges resulting from the pandemic. We expect a reacceleration of Chinese growth in the second half of 2022 largely driven by policy support both monetary and fiscal.
Russian Energy Cut-off Scenario
Now in the first ultimate tail risk scenario, what we call the Russian energy cut-off scenario ,the world experiences an energy shock by a Russian embargo or European boycott of energy trade, resulting in significantly higher inflation, especially in Europe.
In this scenario, we assume this results in stagflation in Europe and bites into real incomes throughout the globe, resulting in overall lower global growth.
Improved War Outlook Scenario
Our other tail risk scenario is the improved war outlook scenario, which is of course a more positive outcome. In this scenario, a surprise de-escalation of hostilities almost eliminates the risk of an embargo or boycott on Russian energy, in turn reducing the current geopolitical risk premium in energy prices as well as the other key commodities. We expect this to yield overall higher growth and expand the leeway for central banks to tighten monetary policy globally.
David Chao:
Hi, I'm David Chao, global market strategist for Invesco Asia Pacific. And I'll be discussing our outlook for China, the APEC region, and our overall mid-year asset allocation views. In contrast with major developed markets, China continues to be in a substantially different cyclical position due to pandemic challenges. Even though new infections have been falling steadily, the COVID zero policy is expected for a while longer. Policymakers are responding in kind and have recently announced a raft of gross stabilizing measures to support SMEs, the property and labor market, which should lead to growth picking up in the second half of this year. Going forward, we expect the majority of cities to gradually ease restrictions under this new normal, which consists of a reopening in stages that could first lead to the manufacturing and services sectors staging a meaningful recovery followed later by the consumption and spending.
David Chao:
For the rest of the APAC region, economic growth, inflation and market performances are likely to vary considerably, making country selection critical to asset allocation. Most Asian economies should seek growth close to potential, supported in part by an expected rebound in tourism and domestic consumption. As was the case two years ago when the pandemic started, we feel greater uncertainty than usual, which is reflected in our mid-year outlook asset allocation, which maintains a broadly neutral risk stance relative to the benchmark. We expect a narrow dispersion in returns across bonds, credit, and equities, similar to the first half of this year, but in positive territory, we overweight quality and low volatility equities with a tilt towards the defensive and cyclical sectors and underweight risky credit as a cycle matures and policy becomes restrictive.